[Senate Hearing 110-1224]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 110-1224
 
                    ENERGY MARKET MANIPULATION AND 

                      FEDERAL ENFORCEMENT REGIMES
=======================================================================


                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,

                      SCIENCE, AND TRANSPORTATION

                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              JUNE 3, 2008

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation





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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                   DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska, Vice Chairman
    Virginia                         JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts         KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            GORDON H. SMITH, Oregon
BILL NELSON, Florida                 JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington           JOHN E. SUNUNU, New Hampshire
FRANK R. LAUTENBERG, New Jersey      JIM DeMINT, South Carolina
MARK PRYOR, Arkansas                 DAVID VITTER, Louisiana
THOMAS R. CARPER, Delaware           JOHN THUNE, South Dakota
CLAIRE McCASKILL, Missouri           ROGER F. WICKER, Mississippi
AMY KLOBUCHAR, Minnesota
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
   Christine D. Kurth, Republican Staff Director and General Counsel
                  Paul Nagle, Republican Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 3, 2008.....................................     1
Statement of Senator Cantwell....................................     1
Statement of Senator Carper......................................    66
    Prepared statement...........................................    67
Statement of Senator Dorgan......................................     3
Statement of Senator Klobuchar...................................     7
Statement of Senator Nelson......................................    71
Statement of Senator Pryor.......................................    63
Statement of Senator Snowe.......................................    62
Statement of Senator Sununu......................................     6
Statement of Senator Thune.......................................    69
Statement of Senator Vitter......................................     8

                               Witnesses

Cooper, Dr. Mark, Director of Research, Consumer Federation of 
  America........................................................    44
    Prepared statement...........................................    46
Greenberger, Michael, Professor, University of Maryland School of 
  Law; and former Director, Division of Trading and Markets, 
  Commodity Futures Trading Commission (CFTC)....................    13
    Prepared statement...........................................    15
Ramm, Gerry, President, Inland Oil Company, Ephrata, Washington 
  on behalf of the Petroleum Marketers Association of America....    35
    Prepared statement...........................................    36
Soros, George, Chairman, Soros Fund Management, LLC..............     8
    Prepared statement...........................................    11
Watson, Lee Ann, Deputy Director, Division of Investigations, 
  Office of Enforcement, Federal Energy Regulatory Commission 
  (FERC).........................................................    39
    Prepared statement...........................................    41

                                Appendix

Boxer, Hon. Barbara, U.S. Senator from California, prepared 
  statement......................................................    81
IntercontinentalExchange, Inc. (ICE) and ICE Futures Europe, 
  prepared statement.............................................    81
Joint Analysis prepared by Majority and Minority Staffs of the 
  Senate Permanent Subcommittee on Investigations, Committee on 
  Homeland Security and Governmental Affairs of Michael 
  Greenberger's Testimony before Senate Committee on Commerce, 
  Science, and Transportation on June 3, 2008....................    83
Response to written questions submitted by Hon. Thomas R. Carper 
  to:
    Dr. Mark Cooper..............................................    93
    Michael Greenberger..........................................    89
Response to written questions submitted by Hon. Olympia J. Snowe 
  to:
    Michael Greenberger..........................................    90
    Gerry Ramm...................................................    91
    Lee Ann Watson...............................................    92


       ENERGY MARKET MANIPULATION AND FEDERAL ENFORCEMENT REGIMES

                              ----------                              


                         TUESDAY, JUNE 3, 2008

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m. in room 
SR-253, Russell Senate Office Building, Hon. Maria Cantwell, 
presiding.

           OPENING STATEMENT OF HON. MARIA CANTWELL, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Cantwell. Good morning. I would like to welcome 
everyone to today's hearing on energy market manipulation and 
thank our distinguished witnesses for being here today: George 
Soros, Chairman of Soros Fund Management; Professor Michael 
Greenberger, University of Maryland School of Law; Gerry Ramm, 
President of Inland Oil, on behalf of the Petroleum Marketers 
Association of America; Lee Ann Watson, Deputy Director of the 
Division of Investigation Enforcement for the Federal Energy 
Regulatory Commission; and Mark Cooper, Director of Research 
for the Consumer Federation of America.
    We are here today to examine whether today's record high 
oil and petroleum prices can be explained or predicted by 
normal market dynamics of supply-and-demand fundamentals, what 
connection exists between financial markets, particularly the 
futures market, the price at the pump that consumers are paying 
today, how the Federal Trade Commission's Advance Notice of 
Proposed Rulemaking can lead to more meaningful consumer 
protection, what the Federal Trade Commission's consideration 
should be in the area of manipulation, and what lessons the FTC 
can learn from other Federal agencies whose oversight of 
electricity and natural gas markets have encumbered 
manipulation in those markets. In short, we are here today to 
make sure that Federal agencies are doing their job in 
protecting consumers and policing the oil markets.
    Why is this such a concern? Well, one reason is that we've 
seen more than a doubling of oil prices, from $60 to $135 a 
barrel, in just over 2 years. And that is without a major 
supply disruption. We also have seen manipulation of energy 
prices in other markets. Enron and others manipulated the 
western electricity markets in 2000 and 2001, and it cost 
consumers $40 billion. In light of that, Congress gave the 
Federal Energy Regulatory Commission new authority in the 
Energy Act of 2005. Specifically, Congress made it unlawful for 
any person to use or employ any manipulative or deceptive 
devices or contrivances in connection with wholesale 
electricity and natural gas markets.
    We are here today to hear from the FERC's deputy director 
of investigation enforcement on how FERC used its new authority 
to root out manipulation in the physical electricity and 
natural gas markets. To date, FERC has used its new authority 
to conduct 64 investigations, resulting in 14 settlements, 
totaling over 48 million in civil penalties. And we have seen 
the very same traders move from Enron to Amaranth, and American 
families and businesses have the same concerns that the 
potential of those same types of practices actually occurring 
in the oil markets.
    In December of 2007, Congress granted the Federal Trade 
Commission anti-manipulation authority in that year's energy 
bill. Specifically, it said that it is unlawful for any person 
to use or employ any manipulative or deceptive device or 
contrivance in conjunction with the purchase or sale of crude 
oil, gasoline, or petroleum distillates at wholesale.
    These are two laws that have been based on the Security and 
Exchange Act of 1935. Congress did this to provide the Federal 
Energy Regulatory Commission and the Federal Trade Commission 
with the ability to provide a clear standard by which 
manipulation could be based on. In fact, the Supreme Court has 
compared this body of law to, quote, ``a judicial oak which has 
grown from little more than a legislative acorn.''
    The FTC needs to take its new anti-manipulation 
responsibility seriously and write a strong rule, like FERC has 
done, so that consumers will be protected from price 
manipulation. In both the natural gas and oil markets, people 
have seen how the futures price affects the physical prices.
    Recent investigations by the Congress and the Government 
Accountability Office, corroborated by substantial 
congressional testimony from marketers and experts, make clear 
that tight correlation between futures and spot price, and that 
this is what consumers may actually be paying for energy. That 
is why it is so critical for the Commodities Futures Trading 
Commission to be an aggressive cop on the beat to fulfill its 
congressional mandate to protect American energy consumers from 
fraud, manipulation, and excessive speculation in all futures 
markets that trade U.S. products.
    We saw Enron game the futures market to drive future energy 
prices higher so electricity customers would be forced to sign 
higher-priced long-term contracts in the physical market. We 
saw the same thing with Amaranth and natural gas, as a large 
hedge fund drove up the price, the futures price, and natural 
gas customers were forced to pay for even higher physical 
deliveries.
    It is abundantly clear to me that the CFTC is not doing 
everything it can to protect American families and businesses 
from the possible oil price manipulation. Americans may be 
surprised to learn that the oil futures market were 
substantially deregulated by the CFT staff decisions that were 
made behind closed doors. Now, this London and Dubai loophole 
is keeping important U.S. energy trading in the dark, and, 
without proper light, it's this kind of manipulation that can 
happen and give manipulators free rein in energy markets.
    Two weeks ago, I sent a letter to the CFTC, along with 21 
of my colleagues, insisting that they reverse their ``no 
action'' policy and start policing all U.S. oil markets. I know 
several of my colleagues on this Committee joined me in sending 
this letter, including Senators Snowe, Dorgan, Kerry, Boxer, 
Klobuchar, and Claire McCaskill.
    The CFTC's May 29 apparent response to this letter, I 
believe, does not go far enough. The CFTC's response is a 
toothless tiger. There are four things wrong with the CFTC 
approach:
    First, there is no large speculation limits, which are 
critical to preventing fraud, manipulation, and excessive 
speculation.
    Second, the CFTC will not collect the same information that 
it collects from other regulated exchanges, and the information 
will be unaudited and unverifiable.
    Third, unlike any of the fully regulated exchanges, like 
NYMEX, there will be no enforcement mechanism.
    And, fourth, the CFTC's announcement is an agreement to 
agree: there are actually no firm commitments, and all of these 
measures may not even eventually be put in place.
    So, the CFTC announcement appears to be nothing more than a 
ruse to deflect criticism of what is a serious abdication of 
oversight responsibility.
    We look forward to hearing a formal response to our letter 
insisting on the CFTC to fully regulate all energy trading of 
U.S. energy commodities and close the London-Dubai oil 
loophole. If the CFTC does not act, I am planning on 
introducing legislation that will force them to do so. For 
those of us who suffered the manipulations of Enron, we have 
plenty of perspective to share with the CFTC. We want you to do 
your job.
    We expect them to police the oil markets on issues of 
fraud, manipulation and excessive speculation, and I hope that, 
today, our witnesses can illuminate these issues for the 
American public and for the consumers that are impacted by 
these record gasoline prices.
    Now I'd like to turn to my colleagues to make their opening 
statements.
    Senator Dorgan?

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Senator Cantwell, thank you very much.
    You mentioned the Enron scandal. I chaired the hearings in 
this Committee when Ken Lay came to that very table and took an 
oath and then took the Fifth Amendment. I recall those of us 
who were concerned about what was happening on the West Coast, 
raising it, time and time again, and everyone said, ``Well, 
that's just the market. It's just the market. Don't intervene, 
the market's at work.'' Turns out to have been a criminal 
enterprise, at least in part, and people were fleeced out of 
billions of dollars.
    It's time, it seems to me now to--I'm not suggesting a 
criminal enterprise with respect to the pricing of energy, but 
I am saying there's a lot of what I call ``dark money'' moving 
around here, the same origin, it seems to me, with respect to 
the subprime loan scandal, dark money that you couldn't see 
where it was and how it was being used, and securitizing 
everything, putting bad loans in with good loans; it's like 
packing sausage with sawdust, as they used to do, and then 
slicing them up moving them around. The same dark money exists, 
in my judgment, with respect to this orgy of speculation with 
respect to energy markets.
    Now, they say there's a free market. People talk about 
market forces. There's no free market here at all. You have a 
cartel, called OPEC, that's at the front end. You've got oil 
companies, bigger and stronger through mergers, that have more 
muscle in the marketplace. And then you have an orgy of 
speculation in the futures markets. There's no free market at 
all. We have what I think is a speculative bubble, and the laws 
of bubbles is that all bubbles burst. The problem is, this 
bubble is causing a dramatic amount of damage to our economy 
and to individuals. Those of us that have studied speculations 
and bubbles understand that, when there was speculation and a 
bubble with respect to tulips, tulip bulbs didn't mean very 
much, because tulip bulbs aren't essential; with respect to 
oil, oil is essential to our economy, and what's happening 
today is hurting this economy and the American people.
    Now, what's happened, in my judgment, and I'm really 
anxious to hear the testimony at this hearing--what's happened, 
in my judgment, is, a lot of new entrants into the futures 
markets. We have hedge funds that are up to their neck in 
futures markets, we have investment banks up to their necks in 
futures markets, investment banks even buying oil storage 
capability in order to store oil, for the first time, and keep 
it off the market. We've got a lot of actions being undertaken 
that undermine what would normally be the forces of the free 
market in which supply and demand would determine what the 
price of oil might be.
    I have a chart that shows the price of oil and a chart that 
shows the entrance of speculators. The chart showing the price 
of oil, which we all know, we see--we've seen what's happened 
to the price of oil, and there's nothing with respect to the 
fundamentals that justifies where that line has moved. And, 
second, the amount of speculation--that is, percentage of oil 
owned by speculators--is a line that looks pretty much the 
same. This dark money with respect to this speculation has 
moved. It migrates from regulated exchanges to unregulated 
exchanges overseas. No one quite knows all of the facts here, 
except that people that drive to the gas pump understand the 
pain, the personal pain for them and their families, and this 
country understands the pain through truckers that are trying 
to figure out how to keep going, how to make a living, airlines 
who are determining whether they have to go bankrupt or not. 
All of these have significant impact on our economy.


        Chart 1.--Price of oil over one year.
        
        
        Chart 2.--Percentage of oil owned by Speculators, 1995-
        2008.

    Senator Dorgan. And, Senator Cantwell, I would just make 
the point that I have long felt and have spoken at length about 
this, there is nothing in the fundamentals that justify what 
has currently happened, and we should, and must, through the 
CFTC, through the Federal Trade Commission and other devices, 
find a way to wring this speculation out of these markets and 
get back to something that reflects a price relating to the 
fundamentals of supply and demand.
    I appreciate the opportunity to make a comment.
    Senator Cantwell. Thank you.
    Senator Sununu----

               STATEMENT OF HON. JOHN E. SUNUNU, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Sununu. Well, thank you----
    Senator Cantwell.--opening statement?
    Senator Sununu. Pardon me?
    Senator Cantwell. Opening statement? Thank you.
    Senator Sununu. Thank you, Madam Chairman.
    Madam Chairman, you talked about the record increase in 
energy prices. We've also seen record increases in other 
commodity and future prices in area of food, for example, and 
it's absolutely essential that the regulatory bodies that we 
have understand what's driving this run-up in prices and work 
to identify any cases of market manipulation, any illegal 
activity that might be an underlying cause, and to fully 
prosecute that market manipulation and illegal activity. The 
FTC has a role, that Senator Dorgan mentioned--the CFTC, the 
SEC. We want to make sure that each of these regulatory 
agencies has the right jurisdiction, has the right tools and 
the right powers of enforcement to address any case of illegal 
activity.
    And it's important, maybe first and foremost, because this 
kind of market manipulation can drive--in driving price 
increases, can drive inflation, and that has an impact on the 
inflation price indices. But, let's face it, it has an impact 
at the pump, it has an impact at the grocery checkout counter, 
as well, that people have been feeling directly over the past 
several months.
    There's also an impact, though, on our markets, the 
exchanges themselves, and I want to make sure that our U.S.-
based exchanges are the world leaders for trading financial 
products, because it's important. It's important to our 
economy. And if we want our exchanges to be world leaders, they 
need to have transparency and speed and integrity. And if 
there's market manipulation, if there's illegal activity, our 
exchanges, whether they're for commodities or futures or 
equities or other financial instruments, they lose their 
integrity. That's one of the reasons I think this is an 
important hearing, an important topic to discuss.
    I'm pleased to see that we have a very distinguished panel. 
I have to admit I'm especially interested to hear what Mr. 
Soros has to say, because, like so many Americans, I'm curious 
to hear what someone who's made billions of dollars on 
speculation has to say about speculation. So, I welcome you 
all. I look forward to the testimony.
    And I thank you, Madam Chairman.
    Senator Cantwell. Thank you, Senator Sununu.
    Senator Klobuchar?

               STATEMENT OF HON. AMY KLOBUCHAR, 
                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. Thank you very much, Madam Chairman, for 
holding this hearing.
    To our witnesses, I just spent the last week in my home 
state of Minnesota, where I heard many tales of woe, with 
regard to gas prices, of people who are deciding not to go up 
to their lake cabin as many weekends as they would. Normally, 
little mom-and-pop resorts that I can tell you are not 
luxurious, are having trouble because people--middle-class 
people simply can't afford to go up and spend a week vacation 
up in northern Minnesota. The high price of energy has inflated 
everything for people, from their food and their 
transportation, and is affecting our economy, as well, our 
business sector in Minnesota.
    I've talked to people who just fill up half their tank with 
gas. I'm not sure what purpose that serves, except that they 
simply don't have the cash to be able to fill up their full 
tank with gas.
    I believe, in the long term, we have to make significant 
changes in this country with a bold energy policy, and this 
means much more research that should have been done 10 years 
ago into hybrid cars, electric cars, it also means the work 
that needs to be done with alternative fuels as we move to the 
next generation of cellulosic ethanol, to look at different 
types of biomass that we can use, from switchgrass to prairie 
grass to other forms of biomass, because we simply can't 
continue the way we are, spending $600,000 a minute on foreign 
oil.
    In the short term, however, I'm very intrigued by the topic 
today. The basis for my interest in this was, first of all, 
when the oil executives testified before Congress. I was struck 
by some of their statements on April 1. It is April Fool's Day. 
But, on April 1 a senior vice president for Exxon said the 
price of oil should be about $50 to $55 per barrel. We also 
have a major merger going on in Minnesota with Delta and 
Northwest Airlines, who are very concerned about that. That's 
our--corporate headquarters of Northwest is in Minnesota. But, 
when those two CEOs testified in two different committees, they 
both pointed to the price of oil. They also pointed to 
speculation as one of their concerns. I thought that was 
interesting, as well. So, you're hearing it on all levels.
    As you know, the farm bill closed the Enron loophole. I'm 
hoping that that will be helpful. But, I think the bottom line 
is, as a former prosecutor--I know you can write all the laws 
you want, we can come up with fancy laws, but if we don't have 
the enforcement of these laws, we're not going to get to where 
we want to go.
    In my old job we used to say ``follow the money and you 
find the bad guys,'' and so, I want to follow the money here 
and figure out how American consumers are getting ripped off.
    I appreciate the work of Senator Cantwell and Senator 
Dorgan on this. The idea that increasing the margin requirement 
for oil trades, I think, is a good one, and also looking at 
some of this offshore trading. So, I hope you're going to 
comment on those, because those are two things that we're 
seriously looking at as ways to get at this speculation issue.
    But, the bottom line, as Senator Cantwell said, is, we need 
a cop on the beat, we also need some prosecutors on the beat. 
But, I want to know, from all of you, how you think we best and 
quickly get at this speculation issue, because the long-term 
solutions are much bigger than what we're going to talk about 
today, but I know there's more we can do in the short term with 
speculation.
    Thank you, and I look forward to hearing your testimony.
    Senator Cantwell. Thank you, Senator Klobuchar.
    Senator Vitter?

                STATEMENT OF HON. DAVID VITTER, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Vitter. Thank you, Madam Chair, and I look forward 
to the testimony, as well.
    The specific title of this hearing seems to be ``Market 
Manipulation,'' and certainly I agree we need to ensure that 
that doesn't go on, and have proper enforcement and rulemaking 
to ensure that. I tend to think active illegality or active 
manipulation is probably a small part of the picture, so I hope 
we also talk in a much broader sense about the role of 
speculation and what that has done to the market, particularly 
in the last year, and look at that, as well.
    I think there is significant evidence that that does play a 
major role in at least the pace of the increases we've seen 
recently. I guess I disagree a little bit with Senator Dorgan, 
that the fundamentals don't suggest a significant increase over 
time. I think a lot of fundamentals do suggest that, but not, 
perhaps, at the pace we've seen.
    So, I hope we look this--at this as an important piece of 
the equation, and also not forget about the fundamentals, the 
increased demand from growing powers, like China and India, and 
the need to address those fundamentals on the supply side, as 
well.
    So, I look forward to the testimony.
    Senator Dorgan. Senator Cantwell, let me just say, I didn't 
say ``over time.'' I talked about the fundamentals that exist 
today. A big difference.
    Senator Cantwell. Thank you.
    Well, let's turn to our witnesses.
    Again, we thank you for being here and making time in your 
schedule to give testimony on this important hearing.
    First, we will hear from George Soros, Chairman of Soros 
Fund Management. He is a world-renowned expert in financial 
markets and recently published a book I found helpful, The New 
Paradigm for Financial Markets: The Credit Crisis of 2008 and 
What It Means.
    Mr. Soros, thank you for being here today, and we look 
forward to your testimony.

             STATEMENT OF GEORGE SOROS, CHAIRMAN, 
                   SOROS FUND MANAGEMENT, LLC

    Mr. Soros. Thank you very much----
    Senator Cantwell. And, if you could, just turn your 
microphone on and maybe pull it closer to you so we can capture 
your----
    Mr. Soros. I'm very honored to be invited to testify before 
your Committee.
    As I understand it, you are seeking an explanation for the 
recent sharp rise in the oil futures and in gasoline prices. In 
particular, you want to know whether this rise constitutes a 
bubble, and, if it is a bubble, whether better regulation could 
mitigate the harmful consequences.
    In trying to answer these questions, I must stress that I'm 
not an expert in oil markets; I have, however, made a lifelong 
study of bubbles, so I will briefly outline my theory of 
bubbles, which is at odds with the conventional wisdom, and 
then discuss the current situation in the oil market.
    I shall focus on financial institutions investing in 
commodity indexes as an asset class, because this is a 
relatively recent phenomenon and it has become the elephant in 
the room in the futures market.
    According to my theory, every bubble has two components: a 
trend based on reality and a misconception or misinterpretation 
of that reality, of that trend. Financial markets are usually 
very good at correcting misconceptions, but occasionally 
misconceptions can lead to bubbles, because they can reinforce 
the prevailing trend; and, by doing so, they also reinforce the 
misconception, until the gap between reality and the market's 
interpretation of reality becomes unsustainable. The 
misconception is recognized as a misconception, disillusionment 
sets in, the trend is reversed. A decline in the value of 
collaterals provokes margin calls and distressed selling, 
causes an overshoot in the opposite direction. And the bust 
tends to be shorter and sharper than the boom that preceded it.
    Now, this sequence contradicts the prevailing theory of 
financial markets which is based on the belief that markets are 
always right and deviations from equilibrium occur in a random 
manner. The various synthetic financial instruments, like CDOs 
and CLOs, which have played such an important role in turning 
the subprime crisis into a much larger financial crisis, have 
been built on that belief. But, the prevailing theory is wrong. 
Deviations can be self-reinforcing.
    We are currently experiencing the bursting of a housing 
bubble and, at the same time, a rise in oil and other 
commodities, which has some of the earmarks of a bubble. I 
believe the two phenomena are connected in what I call a 
``super bubble'' that has evolved over the last quarter of a 
century. The misconception in that super bubble is that markets 
tend toward equilibrium and deviations are random.
    So much for bubbles, in general.
    With respect to the oil market, I believe there are four 
major factors at play which mutually reinforce each other:
    First, the increasing costs of discovering and developing 
new reserves and the accelerating depletion of existing oil 
fields as they age. This goes under the rather misleading name 
of ``peak oil.''
    Second, there is what may be described as a backward-
sloping supply curve. As the price of oil rises, oil-producing 
countries have less incentive to convert their oil reserves 
underground, which are expected to appreciate in value, into 
dollar reserves above ground, which are losing their value. In 
addition, the high price of oil has allowed political regimes 
which are inefficient and hostile to the West to maintain 
themselves in power; notably in Iran, Venezuela, and Russia. 
Oil production in these countries is declining.
    Third, the countries with the fastest growing demand--
notably, the major oil producers, China and the other Asian 
exporters--keep domestic energy prices artificially low by 
providing subsidies; therefore, rising prices don't reduce 
demand, as they would under normal conditions.
    Fourth, both the trend for lowering speculation and 
institutional commodity index buying reinforce the upward 
pressure on prices. Commodities have become an asset class for 
institutional investors, and they are increasing allocations to 
that asset class by following an index buying strategy. 
Recently, spot prices have risen far above the marginal costs 
of production and far-out forward contracts have risen much 
faster than spot prices. Price charts have taken on a parabolic 
shape which are characteristic of bubbles in the making.
    So, is this a bubble? The answer is that the bubble is 
superimposed on an upward trend in oil prices that has a strong 
foundation in reality. The first three factors I mentioned are 
real and would persist even if speculation and commodity index 
buying were eliminated. In discussing the bubble element, I 
shall focus on institutional buying of commodity indexes as an 
asset class, because it fits so perfectly my theory about 
bubbles.
    Index buying is based on a misconception. Commodity indexes 
are not a productive use of capital. When the idea was first 
promoted, there was a rationale for it. Commodity futures were 
selling at discounts from cash, and institutions could pick up 
additional returns from this so-called ``backwardation.'' 
Financial institutions were indirectly providing capital to 
producers who sold their products forward in order to finance 
production. That was a legitimate investment opportunity. But, 
the field got crowded, and that profit opportunity disappeared. 
Nevertheless, the asset class continues to attract additional 
investment, just because it has turned out to be more 
profitable than other asset classes. It's a classic case of a 
misconception that is liable to be self-reinforcing in both 
directions.
    I find commodity index buying eerily reminiscent of a 
similar craze for portfolio insurance which led to the stock 
market crash of 1987. In both cases, the institutions are 
piling in on one side of the market, and they have sufficient 
weight to unbalance it. If the trend were reversed and the 
institutions as a group headed for the exit as they did in 
1987, there would be a crash.
    To be sure, a crash in the oil market is not imminent. The 
danger currently is in the opposite direction. The rise in oil 
prices aggravates the prospects for a recession. Only when a 
recession is well and truly in place is a declining consumption 
in the developed world likely to outweigh the other factors I 
have listed.
    That makes it desirable to discourage commodity index 
buying while it is still inflating the bubble. There's a strong 
prima facie case against institutional investors pursuing a 
commodity index buying strategy. It is intellectually unsound, 
potentially destabilizing, and distinctly harmful in its 
economic consequences.
    When it comes to taking any regulatory measures, however, 
the case is less clear cut. Regulations may have unintended 
adverse consequences. For instance, they may push investors 
further into unregulated markets which are less transparent and 
offer less protection. But, it may be possible to persuade the 
institutional investors that they are violating the prudent 
man's rule by acting as a herd, just as they did in 1987. If 
not, buying commodities, as distinct from investing in 
commodity-producing enterprises, should be disqualified as an 
asset class for ERISA institutions. The various techniques for 
circumventing speculative position limits should be banned, 
provided the ban can be made to apply to unregulated, as well 
as regulated, markets.
    Now, raising margin requirements would have no effect on 
commodity index buying strategy of financial institutions, 
because they use cash. Nevertheless, it would be justified in 
current circumstances, because it would discourage speculation 
and speculation can distort prices. Varying margin requirements 
and minimum reserve requirements are tools that ought to be 
used more actively to prevent asset bubbles from inflating. 
This is one of the main lessons to be learned from the recent 
financial crisis.
    Finally, dealing with the bubble element should not divert 
our attention from the interrelated problems of global warming, 
energy security, and so-called ``peak oil.'' Although they are 
beyond the scope of these hearings, these are pressing issues 
that require urgent attention.
    I hope my remarks are helpful to your deliberations. Thank 
you.
    [The prepared statement of Mr. Soros follows:]

             Prepared Statement of George Soros, Chairman, 
                       Soros Fund Management, LLC
    Madame Chairperson, distinguished Members, I am honored to be 
invited to testify before your Committee. As I understand it, you are 
seeking an explanation for the recent sharp rise in the oil futures 
market and in gasoline prices. In particular, you want to know whether 
this rise constitutes a bubble and, if it is a bubble, whether better 
regulation could mitigate the harmful consequences.
    In trying to answer these questions, I must stress that I am not an 
expert in oil markets. I have, however, made a life-long study of 
bubbles. So I will briefly outline my theory of bubbles--which is at 
odds with the conventional wisdom--and then discuss the current 
situation in the oil market. I shall focus on financial institutions 
investing in commodity indexes as an asset class because this is a 
relatively recent phenomenon and it has become the ``elephant in the 
room'' in the futures market.
    According to my theory, every bubble has two components: a trend 
based on reality and a misconception or misinterpretation of that 
trend. Financial markets are usually very good at correcting 
misconceptions. But occasionally misconceptions can lead to bubbles 
because they can reinforce the prevailing trend and by doing so they 
also reinforce the misconception until the gap between reality and the 
market's interpretation of reality becomes unsustainable. The 
misconception is recognized as a misconception, disillusionment sets 
in, and the trend is reversed. A decline in the value of collaterals 
provokes margin calls and distress selling causes an overshoot in the 
opposite direction. The bust tends to be shorter and sharper than the 
boom that preceded it.
    This sequence contradicts the prevailing theory of financial 
markets, which is based on the belief that markets are always right and 
deviations from equilibrium occur in a random manner. The various 
synthetic financial instruments like CDOs and CLOs which have played 
such an important role in turning the subprime crisis into a much 
larger financial crisis have been built on that belief. But the 
prevailing theory is wrong. Deviations can be self-reinforcing. We are 
currently experiencing the bursting of a housing bubble and, at the 
same time, a rise in oil and other commodities which has some of the 
earmarks of a bubble. I believe the two phenomena are connected in what 
I call a super-bubble that has evolved over the last quarter of a 
century. The misconception in that super-bubble is that markets tend 
toward equilibrium and deviations are random.
    So much for bubbles in general. With respect to the oil market in 
particular, I believe there are four major factors at play which 
mutually reinforce each other.
    First, the increasing cost of discovering and developing new 
reserves and the accelerating depletion of existing oil fields as they 
age. This goes under the rather misleading name of ``peak oil''.
    Second, there is what may be described as a backward-sloping supply 
curve. As the price of oil rises, oil-producing countries have less 
incentive to convert their oil reserves underground, which are expected 
to appreciate in value, into dollar reserves above ground, which are 
losing their value. In addition, the high price of oil has allowed 
political regimes, which are inefficient and hostile to the West, to 
maintain themselves in power, notably Iran, Venezuela and Russia. Oil 
production in these countries is declining.
    Third, the countries with the fastest growing demand, notably the 
major oil producers, and China and other Asian exporters, keep domestic 
energy prices artificially low by providing subsidies. Therefore rising 
prices do not reduce demand as they would under normal conditions.
    Fourth, both trend-following speculation and institutional 
commodity index buying reinforce the upward pressure on prices. 
Commodities have become an asset class for institutional investors and 
they are increasing allocations to that asset class by following an 
index buying strategy. Recently, spot prices have risen far above the 
marginal cost of production and far-out, forward contracts have risen 
much faster than spot prices. Price charts have taken on a parabolic 
shape which is characteristic of bubbles in the making.
    So, is this a bubble? The answer is that the bubble is super-
imposed on an upward trend in oil prices that has a strong foundation 
in reality. The first three factors I mentioned are real and would 
persist even if speculation and commodity index buying were eliminated. 
In discussing the bubble element I shall focus on institutional buying 
of commodity indexes as an asset class because it fits so perfectly my 
theory about bubbles.
    Index buying is based on a misconception. Commodity indexes are not 
a productive use of capital. When the idea was first promoted, there 
was a rationale for it. Commodity futures were selling at discounts 
from cash and institutions could pick up additional returns from this 
so-called ``backwardation.'' Financial institutions were indirectly 
providing capital to producers who sold their products forward in order 
to finance production. That was a legitimate investment opportunity. 
But the field got crowded and that profit opportunity disappeared. 
Nevertheless, the asset class continues to attract additional 
investment just because it has turned out to be more profitable than 
other asset classes. It is a classic case of a misconception that is 
liable to be self-reinforcing in both directions.
    I find commodity index buying eerily reminiscent of a similar craze 
for portfolio insurance which led to the stock market crash of 1987. In 
both cases, the institutions are piling in on one side of the market 
and they have sufficient weight to unbalance it. If the trend were 
reversed and the institutions as a group headed for the exit as they 
did in 1987 there would be a crash.
    To be sure a crash in the oil market is not imminent. The danger 
currently comes from the other direction. The rise in oil prices 
aggravates the prospects for a recession. Only when a recession is well 
and truly in place is a decline in consumption in the developed world 
likely to outweigh the other factors I have listed. That makes it 
desirable to discourage commodity index trading while it is still 
inflating the bubble.
    There is a strong prima facie case against institutional investors 
pursuing a commodity index buying strategy. It is intellectually 
unsound, potentially destabilizing and distinctly harmful in its 
economic consequences.
    When it comes to taking any regulatory measures, however, the case 
is less clear cut. Regulations may have unintended, adverse 
consequences. For instance, they may push investors further into 
unregulated markets which are less transparent and offer less 
protection. It may be possible to persuade institutional investors that 
they are violating the ``prudent man's rule'' by acting as a herd just 
as they did in 1987. If not, buying commodities--as distinct from 
investing in commodity producing enterprises--should be disqualified as 
an asset class for ERISA institutions. The various techniques for 
circumventive speculative position limits should be banned, provided 
the ban can be made to apply to unregulated as well as regulated 
markets.
    Raising margin requirements would have no effect on the commodity 
index buying strategy of financial institutions because they use cash. 
Nevertheless, it would be justified because it would discourage 
speculation, and speculation can distort prices. Varying margin 
requirements and minimum reserve requirements are tools that ought to 
be used more actively to prevent asset bubbles from inflating. This is 
one of the main lessons to be learned from the recent financial crisis.
    Finally, dealing with the bubble element should not divert our 
attention from the inter-related problems of global warming, energy 
security and so-called ``peak oil''. Although they are beyond the scope 
of these hearings, these are pressing issues that require urgent 
action.
    I hope my remarks are helpful to your deliberations. Thank you.

    Senator Cantwell. Thank you, Mr. Soros.
    Now we turn to Professor Greenberger, University of 
Maryland Law School, former Director of Trading and Markets at 
the CFTC, and who has worked with the President's Working Group 
on Financial Markets.
    Mr. Greenberger, welcome.

          STATEMENT OF MICHAEL GREENBERGER, PROFESSOR,

        UNIVERSITY OF MARYLAND SCHOOL OF LAW; AND FORMER

           DIRECTOR, DIVISION OF TRADING AND MARKETS,

          COMMODITY FUTURES TRADING COMMISSION (CFTC)

    Mr. Greenberger. Thank you.
    I've submitted a lengthy statement, attempting to 
anticipate in detail many of the issues that have arisen over 
this--over these concerns.
    Today, let me just say this. Senator Klobuchar said, ``We 
passed the `End the Enron Loophole.' I hope it's enforced.'' 
The ``End the Enron Loophole,'' because it was written by the 
Intercontinental Exchange, handed to the CFTC, and then handed 
to Congress, does not deal with crude oil. By its language, it 
appears to deal with crude oil, but the CFTC has announced it 
will not use that to bring unregulated crude oil markets under 
United States regulatory control.
    Why is that? Senator Cantwell talked about the London-Dubai 
loophole. The CFTC takes the position that West Texas 
Intermediate contracts sold in the United States by U.S.-owned 
or U.S.-affiliated exchanges, because they have some tangential 
relationship to either London or Dubai, should be regulated, in 
the case of Dubai, by the Dubai Financial Services Authority. 
The CFTC, on May 20, 2007, reached a decision that it would not 
regulate Dubai's entrance into the United States markets, 
because Dubai has comparable futures regulation to the United 
States. What that suggests is, when your constituents come to 
you and ask you, ``Is speculation under control?'' if you want 
to leave the status quo as it is, you must tell them, ``I 
believe so, because I have every confidence that Dubai will 
protect those Minnesota citizens who can't go to their summer 
homes.'' The CFTC has abdicated its responsibility to the 
Financial Services Authority in the United Kingdom and to the 
Dubai Financial Services Authority for 30 percent of the West 
Texas Intermediate U.S.-delivered contracts sold in the United 
States of America.
    That is an outrage, and no one ever bothered to tell 
Congress, when it was working on the ``End the Enron 
Loophole,'' which, by the way, in my testimony, I show, even if 
it did apply, it is the biggest joke in the world, because it 
was written by the exchange that needs to be regulated. It puts 
1,000 burdens on the CFTC and the public to prove that there 
needs to be regulation. Prior to the--Senator Phil Gramm's 
introduction in the middle of the night, of the ``End the''--of 
the ``Enron Loophole,'' every futures contract sold in the 
United States of America--every futures contract--oil, 
collateralized debt obligations, credit default swaps--had to 
be traded, pursuant to regulation that had age-old and time-
tested controls on speculators. In one fell swoop, 262 pages of 
deregulation was added to an 11,000-page omnibus fiscal 
appropriation bill as Congress was leaving for its recess in 
December 2000, and that did not call for ``better regulation,'' 
it called for ``no regulation.'' That led to the Enron West 
Coast electricity crisis. There's no doubt about that. The day 
before the documents were released evidencing that crisis, on 
May 15, 2002, Chairman Newsome, of the CFTC, made a speech that 
electricity crisis is a supply demand crisis. Documents were 
released showing how the unregulated--unregulated--speculative 
Enron online trading engine drove prices up 300 percent in the 
West Coast.
    Senator Cantwell has testified about the Bonneville Power 
Administration. In the middle of that bubble, they locked in 
long-term contracts, thinking the price would go up forever. 
When the bubble burst, they had contracts that were three--
long-term contracts, commitments to pay 300 percent of the 
then-market price of natural gas.
    The ``End the Enron Loophole'' is a joke. Turning this 
regulation over to Dubai and the English is a joke. The English 
regulators oversaw the collapse of the Northern Rock Bank in 
London. That bank first got $100 billion in loans from the 
British government and was then nationalized. The FSA, to whom 
we are delegating regulation of crude oil, has said, of its own 
regulation of Northern Rock, ``We dropped the ball.'' Two weeks 
ago, the European Union opened an investigation over the 
failure of the Financial Services Authority in London to 
properly regulate that bank. The only individual in the world 
who will now say, as he has recently said in a letter to the 
Financial Times, that the FSA is ``a model regulator,'' is the 
Acting Chair of the CFTC, Mr. Walter Lukken. Even the other 
Commissioners--Bart Chilton went to London and said, ``The FSA 
is not regulating.''
    But, you bear the burden, unless you change things, of 
saying to your constituents, ``Hey, I can't regulate this. 
We've got an exchange in Atlanta, the Intercontinental 
Exchange, with U.S. trading engines trading United States West 
Texas Intermediate oil, and, don't worry, the United Kingdom is 
on the case.'' And now Dubai has entered the market, so you 
will have to say, ``Dubai is on the case.''
    We must bring these matters under our regulatory regime. We 
must toughen that regime. The CFTC has dragged its heels. Its 
May 29 release is evidence that it's dragged its heels. The FTC 
must be encouraged to quickly move into this area and do the 
proper investigation, as FERC did in the natural gas markets. 
If we do not do anything, we may be in a bubble, but it's an 
iron bubble, and it's an iron bubble because these investment 
banks and these hedge funds, knowing they control the price of 
these products through the futures markets, because they 
manipulate it upwards, are buying the underlying commodity.
    The largest holder of heating oil in New England is Morgan 
Stanley. The bubble will be hard to burst as long as Mr. 
Soros's theory that they're not going to exchange that heating 
oil for U.S. dollars because they're driving the price of 
heating oil up, and that forces the U.S. dollar down--it's a 
very bad trade. There is mini-hoarding going on in New England 
and all over this country by investment banks and hedge funds 
that are holding energy products that can be stored, will not 
release them, because it's a bad trade. They can drive those 
commodity prices up and downgrade the U.S. dollar. They don't 
want to take dollars for those products.
    I'd be happy to answer any other questions. Thank you.
    [The prepared statement of Mr. Greenberger follows:]

  Prepared Statement of Michael Greenberger, Professor, University of 
 Maryland School of Law; and former Director, Division of Trading and 
          Markets, Commodity Futures Trading Commission (CFTC)
Introduction
    My name is Michael Greenberger. I want to thank the Committee for 
inviting me to testify on the important issue that is the subject of 
today's hearings.
    After 25 years in private legal practice, I served as the Director 
of the Division of Trading and Markets (T&M) at the Commodity Futures 
Trading Commission (CFTC) from September 1997 to September 1999. In 
that capacity, I supervised approximately 135 CFTC personnel in CFTC 
offices in DC, New York, Chicago, and Minneapolis, including lawyers 
and accountants who were engaged in overseeing the Nation's futures 
exchanges. During my tenure at the CFTC, I worked extensively on, inter 
alia, regulatory issues concerning exchange traded energy derivatives, 
the legal status of over-the-counter (OTC) energy derivatives, and the 
CFTC authorization of trading of foreign exchange derivative products 
on computer terminals in the United States.
    While at the CFTC, I also served on the Steering Committee of the 
President's Working Group on Financial Markets (PWG). In that capacity, 
I drafted, or oversaw the drafting of, portions of the April 1999 PWG 
Report entitled ``Hedge Funds, Leverage, and the Lessons of Long-Term 
Capital Management,'' which recommended to Congress regulatory actions 
to be taken in the wake of the near collapse of the Long Term Capital 
Management (LTCM) hedge fund, including Appendix C to that report which 
outlined the CFTC's role in responding to that near collapse. As a 
member of the International Organization of Securities Commissions' 
(IOSCO) Hedge Fund Task Force, I also participated in the drafting of 
the November 1999 IOSCO Report of its Technical Committee relating to 
the LTCM episode: ``Hedge Funds and Other Highly Leveraged 
Institutions.''
    After a two-year stint between 1999 and 2001 as the Principal 
Deputy Associate Attorney General in the U.S. Department of Justice, I 
began service as a Professor at the University of Maryland School of 
Law. At the law school, I have, inter alia, focused my attention on 
futures and OTC derivatives trading, including academic writing and 
speaking on these subjects. I have designed and teach a course entitled 
``Futures, Options, and Derivatives,'' in which the United States 
energy futures trading markets are featured as a case study of the way 
in which unregulated or poorly regulated futures and derivatives 
trading cause dysfunctions within those markets and within the U.S. 
economy as a whole, including causing the needlessly high prices which 
energy consumers now pay because of the high probability of excessive 
speculation and illegal manipulation and fraud within those markets.
    The question whether there has been manipulation of U.S. energy 
futures markets in general, and U.S. delivered crude oil contracts 
specifically, has been the subject of many hearings. I have previously 
testified at three of those hearings, the most recent held on December 
12, 2007 hearing before the Subcommittee on Oversight and 
Investigations of the U.S. House Committee on Energy and Commerce. To 
put the issue of today's hearing in context, I summarize the points I 
made at that hearing immediately below.
Summary of Prior Testimony
    One of the fundamental purposes of futures contracts is to provide 
price discovery in the ``cash'' or ``spot'' markets. Those selling or 
buying commodities in the ``spot'' markets rely on futures prices to 
judge amounts to charge or pay for the delivery of a commodity.\1\ 
Since their creation in the agricultural context decades ago, it has 
been widely understood that, unless properly regulated, futures markets 
are easily subject to distorting the economic fundamentals of price 
discovery (i.e., cause the paying of unnecessarily higher or lower 
prices) through excessive speculation, fraud, or manipulation.
---------------------------------------------------------------------------
    \1\ See Written Testimony of Professor Michael Greenberger, Energy 
Speculation: Is Greater Regulation Necessary to Stop Price 
Manipulation?: Hearing Before the H. Subcomm. on Oversight and 
Investigations, 3-5 (2007) available at http://
digitalcommons.law.umaryland.
edu/cgi/viewcontent.cgi?article=1011&context=cong_test (last visited 
June 1, 2008).
---------------------------------------------------------------------------
    The Commodity Exchange Act (CEA) has long been judged to prevent 
those abuses. Accordingly, prior to the hasty and last minute passage 
of the Commodity Futures Modernization Act of 2000 (CFMA), ``all 
futures activity [was] confined by law (and eventually to criminal 
activity) to [CFTC regulated] exchanges alone.'' \2\ At the behest of 
Enron, the CFMA authorized the ``stunning'' change to the CEA to allow 
the option of trading energy commodities on deregulated ``exempt 
commercial markets,'' i.e., exchanges exempt from CFTC, or any other 
federal or state, oversight, thereby rejecting the contrary 1999 advice 
of the President's Working Group on Financial Markets. Id. This is 
called ``the Enron Loophole.''
---------------------------------------------------------------------------
    \2\ Philip McBride Johnson & Thomas Lee Hazen, Commodities 
Regulation 28 (Cumm. Supp. 2008).
---------------------------------------------------------------------------
    Two prominent and detailed bipartisan studies of the Permanent 
Subcommittee on Investigations (SPI) staff represent what is now 
conventional wisdom: hedge funds, large banks and energy companies, and 
wealthy individuals have used ``exempt commercial energy futures 
markets'' to drive up needlessly the price of energy commodities over 
what economic fundamentals dictate, adding, for example, what the SPI 
estimated to be at $20-$30 per barrel to the price of a barrel of crude 
oil at a time when that commodity had reached a then record high of 
$77. The conclusion that speculation has added a large premium to 
energy products has been corroborated by many experts, including most 
recently and most prominently, George Soros.\3\
---------------------------------------------------------------------------
    \3\ See, e.g., Edmund Conway, George Soros: rocketing oil price is 
a bubble, Daily Telegraph (May 27, 2008) available at http://
www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/26/
cnsoros126.xml (last visited June 1, 2008) (quoting Mr. George Soros as 
stating ``Speculators are largely responsible for driving crude prices 
to their peaks in recent weeks and the record oil price now looks like 
a bubble''); Written Testimony of Michael Masters, Hearing Before the 
Committee on Homeland Security and Governmental Affairs, U.S. Senate 2 
(May 20, 2008) available at http://hsgac.senate.gov/public/_files/
052008Masters.pdf (last visited June 1, 2008) (quoting Michael W. 
Masters as stating ``Are Institutional Investors contributing to food 
and energy price inflation? And my unequivocal answer is YES''); 
Alejandro Lazo, Energy Stocks Haven't Caught Up With Oil Prices, Wash. 
Post (Mar. 23, 2008) available at http://www.washingtonpost.com/wpdyn/
content/article/2008/03/21/AR2008032103825.html (last visited June 1, 
2008) (quoting Mr. Fadel Gheit as stating ``The largest speculators are 
the largest financial companies''); Michelle Foss, United States 
Natural Gas Prices to 2015, Oxford Institute for Energy Studies 34 
(2007) available at http://www.oxfordenergy.org/pdfs/NG18.pdf (last 
visited June 1, 2008) (asserting ``The role of speculation in oil 
markets has been widely debated but could add upwards of $20 to the 
price per barrel''); Economist Blames Subsidies for Oil Price Hike, 
Advantage Bus. Media (2008), available at http://www.chem.info/ShowPR.
aspx?PUBCODE=075&ACCT=0000100&ISSUE=0609&ORIGRELTYPE=DM&RELTYPE=PR&
PRODCODE=00000&PRODLETT=M&CommonCount=0 (last visited June 1, 2008) 
(quoting Dr. Michelle Foss as stating ``We have an overpriced 
commodity, and this is going to be around for a while''); Kenneth N. 
Gilpin, OPEC Agrees to Increase Output in July to Ease Oil Prices, N.Y. 
Times (June 3, 2004) available at http://www.nytimes.com/2004/06/03/
business/03CND
OIL.html?ei=5007&en=5dbd50c5b369795b&ex=1401681600&partner=USERLAND&page
wanted
=all&position (last visited June 1, 2008) (quoting Mr. Kyle Cooper as 
stating ``There is not a crude shortage, which is why OPEC was so 
reluctant to raise production.''); Speculators `not to blame' for oil 
prices, Upstream, (April 4, 2008) available at http://
www.upstreamonline.com/live/article151805.ece (last visited June 1, 
2008) (quoting Mr. Sean Cota as stating ``It has become apparent that 
excessive speculation on energy trading facilities is the fuel that is 
driving this runaway train in crude prices''); Mike Norman, The Danger 
of Speculation, FoxNews.com (Aug. 19, 2005) available at http://
www.foxnews.com/story/0,2933,166038,00.html (last visited June 1, 2008) 
(Mr. Norman stating ``Oil prices are high because of speculation, pure 
and simple. That's not an assertion, that's a fact. Yet rather than 
attack the speculation and rid ourselves of the problem, we flail away 
at the symptoms.'').
---------------------------------------------------------------------------
    The SPI staff and others have identified the Intercontinental 
Exchange (ICE) of Atlanta, Georgia as an unregulated facility upon 
which considerable exempt energy futures trading is done. For purposes 
of facilitating exempt natural gas futures, ICE is deemed a U.S. 
``exempt commercial market'' under the Enron Loophole. For purposes of 
its facilitating U.S. WTI crude oil futures, the CFTC, by informal 
staff action, deems ICE to be a U.K. entity not subject to direct CFTC 
regulation even though ICE maintains U.S. headquarters and trading 
infrastructure, facilitating, inter alia, at 30 percent of trades in 
U.S. WTI futures. That staff informal action may be terminated 
instantly by the CFTC under existing law.\4\
---------------------------------------------------------------------------
    \4\ See Greenberger, supra note 1, at 11-12 (giving a complete 
discussion of the no action letter process including termination).
---------------------------------------------------------------------------
    Virtually all parties now agree the Enron Loophole must be 
repealed. The simplest way to repeal would be to add two words to the 
Act's definition of ``exempt commodity'' so it reads: an exempt 
commodity does ``not include an agriculture or energy commodity;'' and 
two words to 7 U.S.C.  7(e) to make clear that ``agricultural and 
energy commodities'' must trade on regulated markets. An ``energy 
commodity'' definition must be then be added to include crude oil, 
natural gas, heating oil, gasoline, heating oil, metals, etc.\5\ In the 
absence of quick CFTC action permitted by law, the statute should also 
be amended to forbid an exchange from being deemed an unregulated 
foreign entity if its trading affiliate or trading infrastructure is in 
the U.S.; or if it trades a U.S. delivered contract within the U.S. 
that significantly affects price discovery.
---------------------------------------------------------------------------
    \5\ See Greenberger, supra note 1, at 17 (providing a complete 
explanation of this solution).
---------------------------------------------------------------------------
A Critique of the Farm Bill's ``End the Enron Loophole'' Provision
    On May 22, 2008, the Food Conservation and Energy Act of 2008 \6\ 
(the ``Farm Bill'') was enacted into law by a Congressional override of 
President Bush's veto. Title XIII of the Farm Bill is the CFTC 
reauthorization act, which, in turn, includes a provision that was 
intended to ``close'' the Enron Loophole.\7\ Rather than returning to 
the status quo ante prior to the passage of the Enron Loophole by 
simply bringing all energy futures contracts within the full U.S. 
regulatory format with exceptions to regulation granted on a case-by-
case basis under section 4(c) of the CEA, the Farm Bill amendment 
requires the CFTC and the public to prove on a case-by-case basis 
through lengthy administrative proceedings that an individual energy 
contract should be regulated if the CFTC can prove that that contract 
``serve[s] a significant price discovery function in order to detect 
and prevent ``manipulation.'' \8\ This contract-by-contract process 
will take months, if not years, to complete and it will then only apply 
to a single contract. It will doubtless be followed by lengthy and 
costly judicial challenges during which the CFTC and the energy 
consuming public will be required to show that its difficult burden has 
been met. It has also been widely reported that the CFTC intends to use 
the new legislation to show that only a single unregulated natural gas 
futures contract, and not any crude oil futures contracts, should be 
removed from the Enron Loophole and be fully regulated. Thus, by CFTC 
pronouncement, crude oil, gasoline and heating oil futures contracts 
will not be covered by the new legislation.
---------------------------------------------------------------------------
    \6\ Food Conservation and Energy Act of 2008, Pub. L. No. 110-234, 
 13201; 122 Stat. 923 (2008).
    \7\ Id.
    \8\ Id.
---------------------------------------------------------------------------
    It bears repeating that regulatory approach within the Farm Bill 
amendment, especially as narrowly construed by the CFTC, differs 
completely from the regulatory concept underlying the Commodity 
Exchange Act prior to the passage of the Enron Loophole. Before that 
highly deregulatory measure was enacted, all energy futures contracts 
were automatically covered by the Act's protections (i.e., recognizing 
that the very nature a publishing the prices of futures contract is to 
provide price discovery) unless the proponent of the contract carried 
the burden of demonstrating to the CFTC that lesser or no regulation is 
required under  4(c) of the Act, i.e., that there will be no fraud or 
manipulation pursuant to less than the full regulatory posture. In 
other words, the burden had been on the traders to show on a case-by-
case basis that a contract should be deregulated; the Farm Bill puts 
the burden, and an expensive one at that, to prove on a case-by-case 
basis that an energy futures contract should be regulated.
    Moreover, the Farm Bill's attempt to end the Enron Loophole will 
doubtless lead to further regulatory arbitrage. If the CFTC should be 
able to prove that an individual energy futures contract has contract 
has a ``significant price discovery function,'' and thus should be 
subject to regulation, traders will almost certainly simply move their 
trading to equivalent contracts that remain exempt from regulation. 
This was the exact strategy employed by Amaranth when NYMEX imposed 
speculation limits on it in the natural gas futures market. Amaranth 
simply moved those trades that exceeded NYMEX limits to the unregulated 
ICE exchange, where no speculation limits were in place.\9\
---------------------------------------------------------------------------
    \9\ Greenberger, supra note 1, at 7.
---------------------------------------------------------------------------
    Again, the easiest course to end the Enron Loophole was not chosen 
as part of the Farm Bill. The most effective closure would have simply 
returned the Commodity Exchange Act to the status quo ante prior to 
passage of the Enron Loophole. To accomplish this, would have required 
a two word change in two sections of the Act, requiring that ``energy'' 
commodities be treated as ``agricultural'' commodities, thereby 
requiring that all energy futures trading (as is now true of all 
agricultural futures trading) be done on regulated exchanges unless the 
regulated exchange demonstrates the need for a legitimate regulatory 
exemption to CFTC under  4(c) of the Act.\10\
---------------------------------------------------------------------------
    \10\ For the precise description of this two word legislative fix, 
see Greenberger, supra note 1, at 13-14, 17.
---------------------------------------------------------------------------
The Farm Bill Did Not Close the ``Foreign'' Board of Trade Exemption
    As mentioned above, the Intercontinental Exchange (ICE) of Atlanta, 
Georgia for purposes of its facilitating U.S. delivered WTI crude oil 
futures, is deemed by the CFTC, by an informal staff action, to be a 
U.K. entity not subject to direct CFTC regulation even though ICE 
maintains U.S. headquarters and trading infrastructure, facilitating, 
inter alia, at 30 percent of trades in U.S. WTI futures. Moreover, as 
will be shown below,\11\ the Dubai Mercantile Exchange, in affiliation 
with NYMEX, a U.S. exchange, has also commenced trading the U.S. 
delivered WTI contract on U.S. terminals, but is, by virtue of a CFTC 
no action letter, regulated by the Dubai Financial Service Authority. 
The CFTC has made it clear that the Farm Bill amendment could not be 
applied to cover any U.S. delivered crude oil futures contracts on the 
ICE or DME. Instead, those U.S. trades can only be regulated by the 
U.K. and Dubai, respectively.
---------------------------------------------------------------------------
    \11\ See infra notes 62-66 and accompanying text.
---------------------------------------------------------------------------
    It has been a fundamental tenet, recognized by exchanges all over 
the world, that if the trading of futures contracts takes place within 
the United States, that trading, unless otherwise exempted or excluded 
by the Act itself or by the CFTC through an exemption granted pursuant 
to the Futures Trading Practices Act of 1992, (otherwise referred to as 
section 4(c)), is subject to the regulatory jurisdiction of the 
Commodity Futures Trading Commission.\12\ Recognition of that sweeping 
reach of U.S. jurisdiction is evidenced by the fact that most major 
foreign futures exchanges have asked the CFTC for an exemption from the 
full regulatory requirements of the Commodity Exchange Act (CEA) to 
which they might otherwise be subject in order to allow those foreign 
entities to conduct trading in the U.S. on U.S.-based trading terminals 
of foreign delivered futures contracts.\13\ That exemption, premised on 
section 4(c), has been issued to many foreign exchanges through staff 
no action letters, which permit trading on a foreign exchanges) U.S.-
based terminals without that exchange being subject to U.S. statutory 
or regulatory requirements.\14\
---------------------------------------------------------------------------
    \12\ Johnson & Hazen, Derivatives Reg., section 4.05[6] at p. 984 
(2004 ed.) (``[E]ven without substantial activity in the United States, 
jurisdiction will exist [even] when conduct abroad has a substantial 
effect on U.S. markets or U.S. investors.'' (footnotes and citations 
omitted).
    \13\ See U.S. Commodity Futures Trading Commission, Foreign Boards 
of Trade Receiving Staff No Action Letters Permitting Direct Access 
from the U.S., http://services.cftc.gov/sirt/
sirt.aspx?Topic=ForeignTerminalRelief (last visited May 29, 2008).
    \14\ Id. (showing that the commission has issued eighteen no action 
letters to foreign boards of trade).
---------------------------------------------------------------------------
    These staff no action letters have been referred to as Foreign 
Board of Trade exemptions (FBOTs)--a term which as of today is nowhere 
found in the CEA. This exemption was entirely the creation of CFTC 
staff and it has never been formally approved by the Commission itself.
    The FBOT staff no action letters include many conditions 
controlling the scope of the exemption.\15\ For example, the foreign 
exchange must be regulated in its ``home'' country by a regulatory 
entity that ensures that there will be no fraud, manipulation, or 
excessive speculation on those exchanges and otherwise offers a 
equivalent regulatory format to that of the CFTC.\16\ These staff no 
action letters also require that the foreign exchange submit trading 
data directly to the CFTC on the latter's request for enforcement or 
investigative purposes and that the home regulator similarly make its 
own trading data available to the CFTC upon request.\17\ The FBOT staff 
no action letter contemplates, for example, if fraud, manipulation or 
excessive speculation affecting U.S. commodity markets were detected by 
the CFTC, the no action letter would be terminated immediately and 
enforcement proceedings would be commenced by the CFTC against the 
foreign exchange for its adverse impacts on U.S. markets and U.S. 
consumers.\18\
---------------------------------------------------------------------------
    \15\ See 17 C.F.R. 140.99 (2008); CFTC Regulation 140.99 (2008); 
e.g., U.S. Commodity Futures Trading Commission, Access to Foreign 
Markets from the U.S., available at http://www.cftc.gov/international/
foreign marketsandproducts/foreignmkts.html (last visited May 29, 
2008).
    \16\ Greenberger, supra note 1, at 11-12; e.g., LIFFE 
Administration & Management, CFTC No-Action Letter, 1999 CFTC Ltr. 
LEXIS 38, 64-66 (July 23, 1999).
    \17\ Greenberger, supra note 1, at 12; e.g., LIFFE, supra note16, 
at 68-71.
    \18\ Greenberger, supra note 1, at 12; e.g., LIFFE, supra note 16, 
at 64.
---------------------------------------------------------------------------
    The staff FBOT no action letter process never contemplated that an 
exchange owned by or affiliated with a U.S. entity would escape the 
CFTC regulation imposed on traditional U.S. exchanges.\19\ Nor did it 
contemplate that foreign exchanges would trade U.S. delivered contracts 
in direct competition with U.S. exchanges fully regulated by the 
CFTC.\20\ Finally, because the step of authorizing foreign exchanges to 
trade on U.S. soil was so fraught with unforeseen potential problems, 
the staff FBOT no action letters by their terms can be terminated for 
any reason or for no reason.\21\
---------------------------------------------------------------------------
    \19\ Greenberger, supra note 1, at 12.
    \20\ Id.
    \21\ Greenberger, supra note 1, at 12; e.g., LIFFE, supra note 16, 
at 73.
---------------------------------------------------------------------------
    In response to this staff FBOT no action process, virtually every 
major foreign exchange in the world has placed its terminals within the 
U.S. pursuant to a no action letter.\22\ The latter factor evidences 
that fact that those many foreign exchanges recognize that they cannot 
obtain desirable liquidity or compete effectively worldwide without a 
U.S. terminal presence. It is therefore a further fundamental tenet of 
futures trading that foreign exchanges must have a U.S. presence to do 
trading. However, none of these FBOT exchanges, save the 
Intercontinental Exchange (ICE) and the Dubai Mercantile Exchange (DME) 
mentioned below, is owned by or affiliated with a U.S. entity; nor do 
they trade U.S. delivered futures contracts.
---------------------------------------------------------------------------
    \22\ U.S. Commodity Futures Trading Commission, Foreign Boards of 
Trade Receiving Staff No Action Letters Permitting Direct Access from 
the U.S., http://services.cftc.gov/sirt/sirt.aspx? 
Topic=ForeignTerminalRelief (last visited May 29, 2008).
---------------------------------------------------------------------------
    The former International Petroleum Exchange (IPE), a British 
exchange then trading foreign delivered petroleum contracts with 
trading matching done in London, received a CFTC staff FBOT no action 
letter permitting the presence of U.S. IPE terminals to trade foreign 
contracts.\23\ In 2001(?), IPE was bought by the Intercontinental 
Exchange an Atlanta-based, U.S.-owned exchange whose prominent founders 
were, inter alia, Goldman Sachs, Morgan Stanley and British 
Petroleum.\24\
---------------------------------------------------------------------------
    \23\ IPE, CFTC No-Action Letter, 1999 CFTC Ltr. LEXIS 152, 53 (Nov. 
12, 1999).
    \24\ See IPE, CFTC No-Action Letter, 2002 CFTC Ltr. LEXIS 90, 3 
fn.3 (July 26, 2002).
---------------------------------------------------------------------------
    Sometime after 2001, it is my understanding that the trade matching 
computerized systems for all ICE trades were brought to the United 
States. ICE has a U.K. subsidiary, ICE Futures Europe, but that that 
subsidiary is does not ultimately control the trading on ICE; nor, as I 
understand it, are the ICE trade matching engines within the U.K.\25\ 
In January, 2006, ICE announced that it would trade West Texas 
Intermediate (WTI) crude oil contracts, a contract which had 
theretofore been traded exclusively on the New York Mercantile Exchange 
(NYMEX), an exchange fully regulated by the CFTC.\26\ It is my 
understanding that this was the first time that a ``foreign'' exchange 
operating under an FBOT traded on its U.S. terminals a U.S. delivered 
futures contract. Despite the fact that ICE is now a U.S.-owned 
exchange with U.S. trading engines trading U.S. delivered crude oil 
contracts, the CFTC continues to treat that exchange as a U.K. entity 
for purposes of its energy contracts to be directly regulated 
exclusively by the Financial Services Authority (FSA) of the United 
Kingdom.\27\
---------------------------------------------------------------------------
    \25\ See ICE Futures Europe, available at https://www.theice.com/
about_futures.jhtml (last visited May 29, 2008).
    \26\ Permanent Subcommittee on Investigations of the Committee on 
Homeland Security and Governmental Affairs, The Role of Market 
Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on 
the Beat 5 (June 27, 2006).
    \27\ U.S. Commodity Futures Trading Commission, Foreign Boards of 
Trade Receiving Staff No Action Letters Permitting Direct Access from 
the U.S., http://services.cftc.gov/sirt/sirt.aspx? 
Topic=ForeignTerminalRelief (last visited May 29, 2008); see, e.g., 
ICE, CFTC No-Action Letter, 2003 CFTC Ltr. LEXIS 3 (2003).
---------------------------------------------------------------------------
    For purposes of U.S. delivered natural gas futures contracts, ICE 
has also been exempt from CFTC regulation by the so-called Enron 
Loophole passed as part of the Commodity Futures Modernization Act of 
2000.\28\ As part of the CFTC Reauthorization Act within the recently 
passed Farm Bill, provision was made for the CFTC on a case-by-case 
basis to demonstrate that an energy contract deregulated by the Enron 
Loophole has a ``significant price discovery function,'' thereby 
bringing that contract under CFTC jurisdiction.\29\ Were it not for the 
staff FBOT no action letter given to the IPE to trade foreign crude oil 
contracts outside of CFTC regulation, the West Texas Intermediate (WTI) 
futures contract traded on ICE would doubtless be deemed a contract 
that significantly affects price discovery under the new Farm Bill 
amendment. Accordingly, it would be subject to U.S. regulation.
---------------------------------------------------------------------------
    \28\ See 7 U.S.C.  2(h)(3) and (g) (2000).
    \29\ See Food Conservation and Energy Act of 2008, Pub. L. No. 110-
234,  13201; 122 Stat. 923 (2008). As noted above, the Farm Bill 
amendment has inherent weaknesses standing on its own. See supra notes 
6-10 and accompanying text.
---------------------------------------------------------------------------
    While the plain language of the Farm Bill amendment by its terms 
does not contemplate exemptions for U.S. delivered contract affecting 
price discovery, even if traded by a foreign exchange, the CFTC and ICE 
have maintained that the ICE traded WTI contract will nevertheless 
continue to be outside the CFTC's jurisdiction even if the Farm Bill 
amendment were applied to it. Again, this conclusion relies, not on 
statutory language, but on the 1999 staff no action letter issued to 
the old British based IPE.\30\ That is, even if the CFTC found (as it 
almost certainly would) that the WTI contract significantly affects the 
price of crude oil, gasoline, and heating oil to U.S. consumers, the 
CFTC and ICE have taken the position that that contract as traded on 
ICE will continue to be outside the CFTC's jurisdiction.\31\ In short, 
ICE will continue to be regulated by the U.K.'s Financial Services 
Authority for purposes of the WTI contract traded on its U.S. terminals 
instead of the CFTC.
---------------------------------------------------------------------------
    \30\ See Written Testimony of Jeffrey Harris, Chief Economist 
Before the Committee on Energy and Natural Resources U.S. Senate, 5-7 
(2008) available at http://www.cftc.gov/stellent/groups/public/ 
@newsroom/documents/speechandtestimony/opaharris040308.pdf (last 
visited May 29, 2008); Written Testimony of Jeffrey C. Sprecher, 
Chairman and CEO of Intercontinental Exchange, Natural Gas Hearings 
(2007) available at https://www.theice.com/showpr.jhtml?id=6685; 
Written Testimony of Sir Bob Reid, Chairman ICE Futures, Before the 
Commodity Futures Trading Commission Public Hearing on Foreign Boards 
of Trade (2006) available at https://www.theice.com/publicdocs/press/
TESTIMONY_OF_SIR_BOB_REID
_JUN_27.pdf (last visited May 29, 2008).
    \31\ See supra note 30 and accompanying text.
---------------------------------------------------------------------------
    The Senate Permanent Investigating Subcommittee has now issued two 
reports, one in June 2006 \32\ and one in June 2007 \33\, that make a 
very strong (if not irrefutable case) that trading on ICE has been used 
to manipulate or excessively speculate in U.S. delivered crude oil and 
natural gas contracts.\34\ The June 2006 report cited economists who 
then concluded that when a barrel of crude was at $77 in June 2006, $20 
to $30 dollars of that cost was due to excessive speculation and/or 
manipulation on unregulated exchanges.\35\ If that assessment is 
correct, at one quarter of the price of crude oil, and crude oil, 
derivatives, such as gasoline and heating oil, are the direct result of 
market malpractices by traders. Of course, we also know through U.S. 
enforcement actions and criminal prosecutions that Enron, using the 
Enron Loophole, for its Enron Online (an exchange that was deregulated 
in the way ICE is deregulated today), drove the price of electricity up 
almost 300 percent a year for California consumers in the 2000-2001 
era.\36\
---------------------------------------------------------------------------
    \32\ Permanent Subcommittee on Investigations of the Committee on 
Homeland Security and Governmental Affairs, The Role of Market 
Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on 
the Beat (June 27, 2006) [hereinafter June 2006 Report].
    \33\ Permanent Subcommittee on Investigations of the Committee on 
Homeland Security and Governmental Affairs, Excessive Speculation in 
the Natural Gas Market, (June 25, 2007) [hereinafter June 2007 Report].
    \34\ See June 2007 Report at 4, 6, 8, 51-53, 111, 119; June 2006 
Report at 40-41, 49.
    \35\ June 2006 Report, supra note 32, at 2, 23. George Soros 
recently warned that ``Speculation . . . is increasingly affecting the 
price. . . . The price has this parabolic shape which is characteristic 
of bubbles.'' Edmund Conway, George Soros: rocketing oil price is a 
bubble, Daily Telegraph (May 27, 2008) available at http://
www.telegraph.co.uk/money/main.jhtml? xml=/money/2008/05/26/
cnsoros126.xml (last visited May 29, 2008).
    \36\ Peter Navarro & Michael Shames, Aftershocks--And Essential 
Lessons--From the California Electricity Debacle, 16 Electricity J. 24, 
24 (2003).
---------------------------------------------------------------------------
    The CFTC has vigorously maintained that the U.K.'s FSA regulatory 
model is at the ``forefront internationally'' \37\ and that it has 
shared meaningful market information about ICE WTI trades with the 
CFTC.\38\ It is self evident, however, when a barrel of crude is 
approaching $140 and predicted by Goldman Sachs to soon pass $200 \39\ 
(with attendant high prices being paid by U.S. consumers for gasoline 
and heating oil) that U.S. regulators would need and want real time, 
fully audited data pertaining to the critically important WTI contract; 
rather than data passed by ICE from the U.S. to the FSA and then from 
the FSA to the CFTC in a haphazard, incomplete, and unaudited fashion. 
In fact, confidence in the legitimacy of the information being shared 
between the CFTC and FSA has led to the CFTC to insist on May 29 that 
it receive better data from the FSA and ICE in order to probe whether 
there has been improper ``market manipulation'' in the crude oil 
markets.\40\
---------------------------------------------------------------------------
    \37\ Walter Lukken, Acting Chairman CFTC, Letters to the Editor: 
CFTC proud of its strong partnership with the Fsa, Fin. Times (April 
25, 2008) available at: http://search.ft.com/
ftArticle?queryText=%22US+regulator+takes+FSA+to+task+over+poor+derivati
ves+oversight&y=
12&aje=true&x=9&id=080422000166&ct=0 (last visited May 29, 2008).
    \38\ Id. See also Walter Lukken, CFTC Commissioner, Remarks to the 
Federation of European Securities Commissions: Smart Regulation for the 
Global Marketplace (June 26, 2007) available at http://www.cftc.gov/
newsroom/speechestestimony/opalukken-25.html; Walter Lukken, CFTC 
Commissioner, Address at the ISDA Energy, Commodities and Developing 
Products Conference: The Derivatives World is Flat (June 14, 2006) 
available at http://www.cftc.gov/newsroom/speechestestimony/opalukken-
20.html (last visited May 29, 2008). But see infra notes 71-74 and 
accompanying textual discussion (where on May 29, 2008, the CFTC had 
suddenly reversed its stance in its regard).
    \39\ Neil King Jr. and Spencer Swartz, U.S. News: Some See Oil at 
$150 This Year--Range of Factors May Sustain Surge; $4.50-a-Gallon Gas, 
Wall St. J., May 7, 2008, at A3.
    \40\ U.S. Commodity Futures Trading Commission, CFTC Announces 
Multiple Energy Market Initiatives, available at http://www.cftc.gov/
newsroom/general pressreleases/2008/pr5503-08.html (last visited May 
30, 2008) (stating that the CFTC has begun increased surveillance of 
crude oil market prices); James Quinn, Oil prices to be probed by U.S. 
regulator CFTC, Daily Telegraph (May 30, 2008) available at http://
www.telegraph.co.uk/money/main. jhtml?xml=/money/2008/05/30/
cnoil130.xml (last visited May 30, 2008) (stating that the CFTC ``has 
launched an unprecedented investigation into possible market 
manipulation in the U.S. crude oil market amid record prices'' that has 
caused critical damage to the global economy).
---------------------------------------------------------------------------
    Recognizing that the CFTC and ICE are taking the position that the 
new ``End the Enron Loophole'' rider on the Farm Bill will not reach 
WTI trading on ICE, S. 2995 was introduced on May 8, 2008, to address 
the FBOT exemption under which ICE is operating outside of CFTC 
jurisdiction for the purposes of crude oil.\41\
---------------------------------------------------------------------------
    \41\ Oil Trading Transparency Act, S. 2995, 110th Cong. (2008); 
e.g., Press Release, Levin and Feinstein Introduce Oil Trading 
Transparency Act (May 8, 2008) available at http://
feinstein.senate.gov/public/index.cfm? 
FuseAction=NewsRoom.PressReleases&ContentRecord_id= de99b838-011a-438e-
02af-23a90bb2fca9&Region_id=&Issue_id= (last visited May 29, 2008); 
Press Release, Levin and Feinstein Introduce Oil Trading Transparency 
Act (May 8, 2008) available at http://levin.senate.gov/newsroom/
release.cfm?id=297513 (last visited May 29, 2008).
---------------------------------------------------------------------------
    The major tenet of that legislation is that any exchange operating 
under an FBOT exemption may only do so if the CFTC finds that the non-
U.S. regulator has regulation that is equivalent to that of the U.S. in 
several respects.\42\ Acting Chairman Lukken has already repeatedly 
stated that he has concluded that the U.K.'s FSA regulation is not only 
comparable, but a model for U.S. regulators.\43\ This statement is 
reflected in the no action letters that have already been awarded to 
ICE and, more recently, to the Dubai Mercantile Exchange, where the 
CFTC has concluded that the Dubai Financial Service Authority's 
regulation of oil futures markets ``is the equivalent of the'' 
CFTC.\44\
---------------------------------------------------------------------------
    \42\ Oil Trading Transparency Act, S. 2995, 110th Cong.  
2(e)(1)(a) (2008).
    \43\ See supra notes 37-38 and accompanying text.
    \44\ See IPE, CFTC No-Action Letter, 1999 CFTC Ltr. Lexis 152, 53 
(Nov. 12, 1999); Dubai Mercantile Exchange, CFTC No-Action Letter, 2007 
CFTC Ltr. Lexis 6 (May 24, 2007).
---------------------------------------------------------------------------
    Thus, if S. 2995 is enacted, it will preserve the status quo of 
FBOTs being allowed to trade U.S. delivered energy future contracts 
within the United States, but not be subject to U.S. regulation. For 
example, ICE-even though U.S.-owned with U.S. trading engines, trading 
critically important U.S. delivered energy futures contracts (contracts 
that would almost certainly otherwise by regulated under the End the 
Enron Loophole amendment)--would continue to be regulated by the United 
Kingdom. Similarly, the DME, in partnership with U.S.-owned NYMEX will 
continue to trade the U.S. delivered WTI contract within the U.S., but 
be regulated by the Dubai Mercantile Exchange.
    Allowing ICE, DME and other FBOTs to be regulated by foreign 
regulators, like the U.K.'s Financial Services Authority and the Dubai 
Financial Service Authority, undermines the stability of the U.S. crude 
oil futures markets. CFTC Commissioner Bart Chilton has recently 
stated, ``I am generally concerned about a lack of transparency and the 
need for greater oversight and enforcement of the derivatives industry 
by the FSA.'' \45\ Similar concerns have been already been voiced by 
experts who argue that the U.K. Financial Services Authority's public 
disclosure, regulatory oversight and enforcement actions are much more 
lax than the CFTC's regulation of exchanges and transactions.\46\
---------------------------------------------------------------------------
    \45\ Jeremy Grant, Companies & Markets: U.S. regulator takes FSA to 
task for poor derivatives oversight, Fin. Times (April 22, 2008) 
available at: http://search.ft.com/ftArticle?query
Text=%22US+regulator+takes+FSA+to+task+over+poor+derivatives+oversight&y
=12&aje=true&x
=9&id=080422000166&ct=0 (last visited May 29, 2008); see, e.g., 
Testimony of Jane Carlin, Chairwoman, Over-the-Counter Derivative 
Products Committee, Securities Industry Association, Hearing on 
Commodity Futures Trading Commission Reauthorization before the House 
Agriculture Committee (May 20, 1999) available at http://www.sifma.org/
legislative/
testimony/archives/Carlin5-20-99.html (last visited May 30, 2008); June 
2006 Report, supra note 32, at 49. ``To continue the present situation, 
in which the CFTC does not police two of three major markets trading 
U.S. energy futures, is to turn a blind eye to an increasingly large 
segment of these markets, thereby impairing the ability to detect, 
prevent, and prosecute market manipulation and fraud.'' Id.
    \46\ See Allistair MacDonald, Assessing U.K. Watchdog: FSA's 
Regulatory Model Gets Some Raves in U.S.; A Lapdog at Home?, Wall 
Street J., July 23, 2007, available at http://online.wsj.com/article/
SB118515214144274556.html (last visited May 29, 2008); Steve 
Pearlstein, Auditing Reform: Mission Accomplished!, Wash. Post, Dec. 
15, 2006, available at http://www.washingtonpost.com/wp-dyn/ content/
article/2006/12/14/AR2006121401796.html (last visited May 29, 2008).
---------------------------------------------------------------------------
    For example, during last summer's subprime mortgage crisis, 
Northern Rock PLC, one of the U.K.'s largest banks, had difficulty 
raising funds and borrowed billions of dollars from the U.K.'s central 
bank.\47\ After news of the bailout was released to the public, 
thousands of customers wary of losing their savings stood in long lines 
for several days outside of Northern Rock's branches to withdraw 
deposits.\48\ With Northern Rock on the brink of collapse, FSA provided 
over $100 billion in loans to the bank and in February 2008, the 
British government finally was required to nationalize it.\49\ In March 
2008, FSA published an internal report stating that its regulation of 
Northern Rock ``was not carried out to a standard that is acceptable,'' 
and highlighted FSA's failure to provide adequate supervision, 
oversight, and resources.\50\ In addition to FSA's self-criticism, 
earlier this month the European Union opened a formal investigation 
into FSA's restructuring of Northern Rock.\51\
---------------------------------------------------------------------------
    \47\ See BBC News, Rock expects 30bn loan this year, 
Nov. 7, 2007, available at http://news.bbc.co.uk/1/hi/business/
7073556.stm (last visited May 29, 2008).
    \48\ See Crisis deepens for Northern Rock, Reuters Sep. 17, 2007, 
available at http://www.iht.com/articles/2007/09/17/asia/17northern.php 
(last visited May 29, 2008).
    \49\ See Stephen Castle, EU to investigate Northern Rock 
nationalization in Britain, International Herald Tribune, April 2, 
2008, available at http://www.iht.com/articles/2008/04/02/business/
rock.php (last visited May 29, 2008).
    \50\ See Associated Press, British regulator admits failings in 
oversight of Northern Rock, announces new procedures, International 
Herald Tribune, March 26, 2008, available at http://www1.wsvn.com/news/
articles/world/MI81198/ (last visited May 29, 2008).
    \51\ See Castle, supra note 49.
---------------------------------------------------------------------------
    This series of events exemplifies FSA's inability to provide 
regulatory oversight and enforcement that is equivalent to the 
CFTC.\52\ Yet, that is the very conclusion the CFTC adopts today as it 
continues to look to the FSA as a ``model'' regulator. To the extent 
that S. 2995 leaves it in the hands of the FSA and the Dubai Financial 
Service Authority to govern the trading of WTI contracts on U.S. 
terminals without U.S. supervision on a finding of ``comparability'' or 
``equivalency,'' it affords the U.S. consumer virtually no meaningful 
protection from fraud, manipulation, or excessive speculation in these 
markets. For almost eight decades the prevention of fraud, 
manipulation, and excessive speculation was the foremost Congressional 
promise to those who need to trade in these markets to protect their 
commercial well being.
---------------------------------------------------------------------------
    \52\ It is also worth noting that ``the FSA places an emphasis on 
deterrence, rather than the use of high-profile prosecutions and fines 
in the US.'' Grant, supra note 45.
---------------------------------------------------------------------------
    Indeed, the language of S. 2995 either expressly or implicitly 
concedes two critical points. First, there is no statute to date that 
provides any exemption for U.S. trading on Foreign Boards of Trade. The 
Commodity Exchange Act says nothing about Foreign Boards of Trade.\53\ 
The proposed legislation then wholly endorses the concept of an FBOT 
exemption despite the fact that many have argued that any foreign 
exchange which wants to introduce trading of its contracts in the U.S. 
ought to be regulated by the CFTC just as U.S. Designated Contract 
Markets (DCMs) are so regulated.\54\
---------------------------------------------------------------------------
    \53\ See generally Oil Trading Transparency Act, S. 2995, 110th 
Cong.  2 (2008); Commodity Exchange Act, 7 U.S.C.  1 (2008).
    \54\ See, e.g., Ian Talley, Congress Seeks to Curb Oil Speculation, 
SmartMoney (May 28 , 2008) available at http://www.smartmoney.com/
breaking-news/ON/index.cfm?story=ON-20080528-000641-1015 (last visited 
May 29, 2008).
---------------------------------------------------------------------------
    Certainly the question whether a foreign exchange may trade U.S. 
delivered commodities within the U.S. free of U.S. regulation should be 
the subject of extensive debate. S. 2995, which has not had the benefit 
of a full hearing in either House of Congress, by its terms when read 
in light of long standing CFTC practices not only sanctions U.K. 
regulation of ICE's WTI trading; it opens the door to any foreign 
exchange operating under an FBOT exemption escaping U.S. regulation for 
any U.S. delivered commodity, e.g., the Henry Hub natural gas contract, 
based solely on the ``comparability'' finding by the CFTC--a finding 
which the CFTC has been quite generous in granting. Under that 
rationale, there is nothing to prevent the Dubai futures exchanges from 
trading Henry Hub natural gas futures contracts within the U.S. free of 
U.S. oversight on a finding by the CFTC of comparability of Dubai 
regulators, which the CFTC has already done in the Dubai Mercantile 
Exchange no action letter. If that were to happen, the only salient 
feature of the End the Enron Loophole amendment (regulating Henry Hub 
natural gas contracts which are now traded on ICE outside of an FBOT 
exemption) would be undercut by foreign exchanges escaping that reform 
by trading in the U.S. under their foreign flag and being regulated by 
their ``comparable'' foreign regulator.
    I understand that the argument has been advanced by certain 
investment banks and their representatives that if Congress does not 
accede to S. 2995, they have threatened to move their trading 
``offshore'' to escape U.S. regulation of foreign exchanges.\55\ 
However, the entire history of these markets is that every foreign 
exchange badly needs to trade within the U.S. That is evidenced by the 
eighteen staff FBOT no action letters issued to foreign exchanges to 
date.\56\ The desire to be in the U.S. is so prevalent that ICE 
apparently brought its IPE trading engines and trading matching systems 
to the U.S.-not just its trading terminals.\57\
---------------------------------------------------------------------------
    \55\ See Carlin, supra note 45.
    \56\ U.S. Commodity Futures Trading Commission, Foreign Boards of 
Trade Receiving Staff No Action Letters Permitting Direct Access from 
the U.S., http://services.cftc.gov/sirt/
sirt.aspx?Topic=ForeignTerminalRelief (last visited May 29, 2008).
    \57\ See IPE, CFTC No-Action Letter, 1999 CFTC Ltr. Lexis 152 (Nov. 
12, 1999). The letter explained the ``request, on behalf of The 
International Petroleum Exchange of London Limited, (``IPE'' or 
``Exchange'') and its members, that the Division grant no-action relief 
to permit IPE to make its electronic trading and order matching system, 
known as Energy Trading System II (ETS), available to IPE members in 
the United States.'' Id.
---------------------------------------------------------------------------
    The argument is also advanced that the investment banks will figure 
out a clever technological way to ``trade abroad'' with U.S.-based 
technology that will fall short of traditional terminals. In that way, 
these traders say they can stay within the U.S. but appear to be 
trading offshore. However, if there is any trading in the U.S. of any 
kind (whatever the technology) of a futures contract within the U.S. of 
a futures contract anywhere, it is subject to U.S. jurisdiction.\58\ 
Indeed, if U.S. citizens manipulate foreign exchanges, they are subject 
to criminal sanctions and, in most instances, would be extradited back 
to the U.S. to face criminal charges if not civil fines if that 
impacted domestic markets and those exchanges had any meaningful 
contacts with the U.S.\59\
---------------------------------------------------------------------------
    \58\ See Johnson & Hazen, supra note 12.
    \59\ See Press Release, Department of Justice, U.S. Charges 47 
After Long-Term Undercover Investigation Involving Foreign Exchange 
Markets, and (Nov. 19, 2003), available at http://www.fbi.gov/
dojpressrel/pressrel03/wooden111903.htm.
---------------------------------------------------------------------------
    Indeed, if one were to be swept away by speculative and 
hypothetical fever proffered by the investment banks about the terrible 
things that would happen if S. 2995 does not pass, why would one not 
worry that a U.S. exchange, such as NYMEX, might flee U.S. restrictions 
by affiliating with a ``foreign'' exchange freed from U.S. supervision 
under the proposed legislation. NYMEX has already established joint 
ventures with Dubai, which the CFTC finds to be a country with 
comparable regulation.
    Foremost is the Dubai Mercantile Exchange, which is a joint venture 
between NYMEX, Tatweer (a member of Dubai Holding) and the Oman 
Investment Fund.\60\ This entity is regulated by the Dubai Financial 
Services Authority \61\ and was granted a CFTC no action letter in 
2007.\62\ As of May 16, 2008, the DME with NYMEX as its partner 
received CFTC approval to begin trading WTI contracts.\63\ In this way, 
NYMEX now effectively participates in the trading of the DME of a 
critically important U.S. delivered contract on U.S. terminals owned by 
the DME while escaping U.S. oversight on the DME's U.S. terminals. I 
worry that NYMEX's escape from U.S. control of these U.S. DME trades is 
wholly consistent with S. 2995.\64\
---------------------------------------------------------------------------
    \60\ Dubai Mercantile Exchange (DME), http://www.dubaimerc.com/ 
(last visited May 29, 2008).
    \61\ Id.
    \62\ Dubai Mercantile Exchange, CFTC No-Action  Letter, 2007 CFTC 
Ltr. Lexis 6 (May 24, 2007).
    \63\ Babu Das Augustine, Dubai `could emerge as derivatives trading 
hub', Gulfnews.com (May 16, 2008) available at http://www.gulfnews.com/
business/General/10213595.html (last visited June 1, 2008).
    \64\ See generally Oil Trading Transparency Act, S. 2995, 110th 
Cong.  2 (e)(1)(a) (2008).
---------------------------------------------------------------------------
    Finally, S. 2995 does not incorporate all of the conditions within 
the present FBOT no action letter typically issued by CFTC staff.\65\ 
Most importantly, the legislation does not provide (as to the staff 
FBOT no action letters) that upon detecting fraud, manipulation, or 
excessive speculation by the FBOT, the CFTC can terminate the no action 
letter and/or can charge traders on FBOT for those malpractices. S. 
2995 leaves that issue untouched and, by implication, I fear that it 
will allow the CFTC to follow its well worn path of least resistance: 
i.e., place enforcement responsibilities on the Dubai Financial 
Services Authority, for example, to remedy excessive gasoline prices 
paid by American consumers. In sum, voters, I am sure, will not accept 
lightly a pronouncement of Congressional futility evidenced by a 
failure to insist on full U.S. regulation of U.S. trading in U.S. 
delivered commodities by U.S.-owned entities merely because certain 
U.S. resident managers of, inter alia, U.S. investment banks and hedge 
funds have threatened to take their business (but not themselves) to 
foreign countries--especially when those threats defy every basic 
premise of futures trading, i.e., the need of each of each the world's 
futures exchanges wherever they are located to have a vibrant U.S.-
based market. Once futures trading of any kind is initiated within, or 
has substantial impacts upon, the U.S., the trader is fully subject to 
U.S. civil and criminal jurisdiction. If those traders wish to leave 
the U.S. permanently to conduct their business and otherwise enjoy 
their leisure time abroad, it seems self evident that that is a 
circumstance that the overwhelming majority of your constituents now 
unnecessarily paying $4.00 and up for a gallon of gasoline will gladly 
accept.
---------------------------------------------------------------------------
    \65\ See id.; 17 C.F.R. 140.99 (2008); CFTC Regulation 140.99 
(2008). Some officials are also skeptical of the assertion that the 
CFTC and FSA have comparable regulatory structures because, ``exchanges 
in London are not required to monitor daily trading to prevent 
manipulation, publish daily trading information, or impose and enforce 
position limits that prevent excessive speculation.'' Senator Dianne 
Feinstein & Senator Olympia J. Snowe, Letter to Walter Lukken, Acting 
Chair of the Commodity Futures Trading Commission (2008) available at 
http://feinstein.senate.gov/public/
index.cfm?FuseAction=NewsRoom.PressReleases&ContentRecord_id=
c9784c93-0be4-0e7d-e6b2-05bce9339894&IsPrint=true (last visited May 29, 
2008).
---------------------------------------------------------------------------
The CFTC's Newly Announced ``Multiple Energy Market Initiatives''
    For at least the last 2 years, two Acting Chairmen of the CFTC 
(Sharon Brown-Hruska and then Walter Lukken), and the CFTC Chief 
Economist, Jeffrey Harris, have repeatedly assured Congress, market 
participants, and anyone else who would listen, that the dramatic rise 
in crude oil, natural gas, gasoline, heating oil, and agricultural 
products is caused exclusively by supply/demand market 
fundamentals.\66\ These regulators have based their conclusions on the 
CFTC's ``exhaustive'' research of all relevant market data.\67\
---------------------------------------------------------------------------
    \66\ Walt Lukken, CFTC, Acting Chairman, Prepared Remarks: 
Compliance and Enforcement in Energy Mkts.--The CFTC Perspective (Jan. 
18, 2008) available at http://www.cftc.gov/stellent/groups/public/
@newsroom/documents/speechandtestimony/opalukken-34.pdf (last visited 
June 1, 2008) (quoting Mr. Walter Lukken ``While speculators play a 
integral role in the futures markets, the report concludes that 
speculative buying, as a whole does not appear to drive up price.''); 
Tina Seeley, Energy Mkts. Not Manipulated, U.S. Regulator Says (Update 
1), Bloomberg.com (May 7, 2008), available at http://www.bloomberg.com/
apps/news?pid
=20601072&sid=aX0iaEd9bOMU&refer=energy (last visited June 1, 2008) 
(quoting Mr. Walter Lukken ``We have not seen that speculators are a 
major factor in driving these prices.''); Ian Talley and Stephen Power, 
Regulator Faults Energy-Futures Proposal, Wall St. J. (May 9, 2008), 
(stating that Mr. Walter Lukken commented that his agency hadn't seen 
evidence indicating that speculators are ``a major factor'' in driving 
up oil prices); Oral Testimony of Walter L. Lukken, Commissioner, CFTC, 
Before the Committee on Agriculture, U.S. House of Representatives, 
(April 27, 2006) (quoting Mr. Walter Lukken ``[B]ased on our 
surveillance efforts to date, we believe that crude oil and gasoline 
futures markets have been accurately reflecting the underlying 
fundamentals of these markets.''); Sharon Brown-Hruska, CFTC, Chairman, 
Address before the International Monetary Fund: Futures Mkts. in the 
Energy Sector (Jun. 15, 2006) available at http://www.cftc.gov/
newsroom/speechestestimony/opabrownhruska-46.html (last visited Jun. 1, 
2008) (stating ``To date, the staff's findings have shown that these 
large speculators as a group tend to inject liquidity into the markets 
rather than having an undue impact on price movements.'') (last visited 
June 1, 2008); Sharon Brown-Hruska, CFTC, Chairman, Keynote Address at 
the Managed Funds Association Annual Forum (Jun. 25, 2005) available at 
http://www.cftc.gov/opa/speeches05/opabrownhruska34.htm (last visited 
June 1, 2008) (stating the CFTC's study of the role of managed funds in 
our markets, ``[C]ontradicts with force the anecdotal observations and 
conventional wisdom regarding hedge funds and speculators, in 
general.'').
    \67\ See, e.g., supra note 66 and accompanying text.
---------------------------------------------------------------------------
    Indeed, as recently as May 20, 2008 before the full Senate Homeland 
Security and Government Affairs Committee, the CFTC's Mr. Harris, 
testified that `` `all the data we have analyzed indicates that that 
little economic evidence exists that demonstrates that futures prices 
are being systematically driven by the speculators in the [agriculture] 
and energy markets.' . . . [O]ur comprehensive analysis of the actual 
position data of these traders fails to support the contention'' that 
there is excessive speculation or manipulation. Rather, he said prices 
are being driven ``by powerful economic fundamental forces and the laws 
of supply demand.'' \68\
---------------------------------------------------------------------------
    \68\ Richard Hill, Lieberman Says He Will Consider Legislation to 
Address Commodity Prices, 40 BNA 21 (May 26, 2008)) (emphasis added).
---------------------------------------------------------------------------
    I have already cited the abundance of informed academic and trader 
opinion that reaches conclusions quite the opposite of those of Ms. 
Brown-Hruska and Messrs. Lukken and Harris.\69\ Those who have blamed 
speculation as a material factor in the rise of energy prices have 
estimated, for example, that up to $90 of the present price of the 
barrel of crude oil has nothing to do with supply/demand, but, instead, 
is caused by unpoliced trader malpractices.\70\
---------------------------------------------------------------------------
    \69\ See, e.g., Edmund Conway, George Soros: rocketing oil price is 
a bubble, Daily Telegraph (May 27, 2008) available at http://
www.telegraph.co.uk/money/main.jhtml?xml=/money/
2008/05/26/cnsoros126.xml (last visited June 1, 2008) (quoting Mr. 
George Soros as stating ``Speculators are largely responsible for 
driving crude prices to their peaks in recent weeks and the record oil 
price now looks like a bubble''); Written Testimony of Michael Masters, 
Hearing Before the Committee on Homeland Security and Governmental 
Affairs, U.S. Senate, 2 (May 20, 2008) available at http://
hsgac.senate.gov/public/_files/052008Masters.pdf (last visited June 1, 
2008) (quoting Mr. Michael W. Masters as stating ``Are Institutional 
Investors contributing to food and energy price inflation? And my 
unequivocal answer is YES''); Alejandro Lazo, Energy Stocks Haven't 
Caught Up With Oil Prices, Wash. Post Online (Mar. 23, 2008) available 
at http://www.washingtonpost.com/wpdyn/content/ article/2008/03/21/
AR2008032103825.html (last visited June 1, 2008) (quoting Mr. Fadel 
Gheit as stating ``The largest speculators are the largest financial 
companies''); Michelle Foss, United States Natural Gas Prices to 2015, 
Oxford Institute for Energy Studies 34 (2007) available at http://
www.oxfordenergy.org/pdfs/NG18.pdf (last visited June 1, 2008) 
(asserting ``The role of speculation in oil markets has been widely 
debated but could add upwards of $20 to the price per barrel''); 
Economist Blames Subsidies for Oil Price Hike, Advantage Bus. Media, 
(2008), available at http://www.chem.info/ShowPR
.aspx?PUBCODE=075&ACCT=0000100&ISSUE=0609&ORIGRELTYPE=DM&RELTYPE=PR&
PRODCODE= 00000&PRODLETT=M&CommonCount=0 (last visited June 1, 2008) 
(quoting Dr. Michelle Foss as stating ``We have an overpriced 
commodity, and this is going to be around for a while''); Kenneth N. 
Gilpin, OPEC Agrees to Increase Output in July to Ease Oil Prices, N.Y. 
Times (June 3, 2004) available at http://www.nytimes.com/2004/06/03/
business/03CND
OIL.html?ei=5007&en=5dbd50c5b369795b&ex=1401681600&partner=USERLAND&page
wanted
=all&position (last visited June 1, 2008) (quoting Mr. Kyle Cooper as 
stating ``There is not a crude shortage, which is why OPEC was so 
reluctant to raise production.''); Speculators `not to blame' for oil 
prices, Upstream, (April 4, 2008) available at http://
www.upstreamonline.com/live/article151805.ece (last visited June 1, 
2008) (quoting Mr. Sean Cota as stating ``It has become apparent that 
excessive speculation on energy trading facilities is the fuel that is 
driving this runaway train in crude prices''); Mike Norman, The Danger 
of Speculation FoxNews.com, (Aug. 19, 2005) available at http://
www.foxnews.com/story/0,2933,166038,00.html (last visited June 1, 2008) 
(Mr. Norman stating ``Oil prices are high because of speculation, pure 
and simple. That's not an assertion, that's a fact. Yet rather than 
attack the speculation and rid ourselves of the problem, we flail away 
at the symptoms.'').
    \70\ See Alexander Kwiatkowski and Grant Smith, Blame Wall Street 
for $135 Oil on Wrong-Way Betting (Update 3), Bloomberg.com (May 22, 
2008) available at http://www.bloom
berg.com/apps/news?pid=20601087&refer=home&sid=a3MgWEz_Qch0 (last 
visited June 1, 2008).
---------------------------------------------------------------------------
    In a rather dramatic about face, the CFTC suddenly announced on May 
29, 2008 (or just 9 days after Mr. Harris' testimony) that that agency 
will now collect substantial amounts of new data to determine what is 
undergirding high energy prices.\71\ That release was divided into 
three parts: (1) an attempt to collect additional data not previously 
within the CFTC's possession about trading activities pertaining to 
ICE's WTI contracts; (2) the collection of new data pertaining to 
``index trading'' by swaps dealers, e.g., certain investment banks and 
hedge funds; and (3) the public announcement of an ongoing nationwide 
crude oil investigation commenced by the CFTC in December 2007 looking 
into possible unlawful trading malpractices.
---------------------------------------------------------------------------
    \71\ Press Release, U.S. Commodity Futures Trading Commission, CFTC 
Announces Multiple Energy Market Initiatives, available at http://
www.cftc.gov/newsroom/general pressreleases/2008/pr5503-08.html (last 
visited May 30, 2008).
---------------------------------------------------------------------------
    Suffice to say for now that the credibility of well over 2 years of 
assurances by Ms. Brown-Hruska and Messrs. Lukken and Harris that all 
was fine in these markets based on the CFTC's analysis of 
``comprehensive'' data has been wholly undermined by the May 29 
release. It is now clear that the data that was being analyzed by the 
CFTC as the basis of its assurances of regularity in these markets was, 
as many had repeatedly warned over the last 2 years, totally inadequate 
and unreliable. There can be little doubt that this complete reversal 
by the CFTC was not motivated by a newly minted aggressive regulatory 
stance. Rather, it was almost driven by political forces that no longer 
allowed Messrs. Lukken and Harris to continue their rosy assessment.
    First, it is certainly more than a mere coincidence that the now 
revealed CFTC investigation into manipulation of the oil markets is 
said to have begun in December 2007. As shown below,\72\ that was the 
very month that this Congress mandated that the FTC-rather than the 
CFTC--examine the crude oil futures markets, especially in light of the 
CFTC's foot dragging. Nothing has spurred the CFTC into action over 
these last 4 years more than legislation undercutting its regulatory 
turf. We need only look at the comparable scenario created by Congress 
in 2005 when it gave FERC the authority to explore natural gas futures 
markets in light of the record high natural gas prices at that 
time.\73\ That legislation also caused the CFTC to abandon its long 
standing assertion that the rise in natural gas prices was caused by 
supply/demand only in order to protect its primacy in overseeing the 
natural gas futures markets. As noted above,\74\ to date, neither the 
courts nor Congress has been kind to the CFTC in its attempt to 
undercut FERC's efforts to police natural gas futures markets. The same 
will doubtless be true when the CFTC attempts to elbow the FTC out of 
its crude oil investigations.
---------------------------------------------------------------------------
    \72\ Energy Independence and Security Act of 2007, Pub. L. No. 110-
140  811, 121 Stat. 1492 (2007).
    \73\ Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594 
(2005).
    \74\ See infra notes 116-25 and accompanying text.
---------------------------------------------------------------------------
    Second, the month of May 2008 has otherwise been unkind to the CFTC 
because of mounting harsh criticism for the agency's noblesse oblige 
attitude toward the economic distress of the American consumer faced 
with crippling gas prices. Those criticisms have been joined by further 
threats to cut back on CFTC authority. For example, Senator Lieberman, 
Chairman of the Senate Homeland Security and Government Affairs 
Committee, at that Committee's May 20 hearing flatly rejected Mr. 
Harris' assurances there that speculation is not at play in energy and 
agricultural price dysfunctions. Senator Lieberman called for the study 
of dramatic legislative measures that would bypass the CFTC and 
directly bar by legislative directive speculators from both energy and 
agricultural futures markets.\75\
---------------------------------------------------------------------------
    \75\ See Hill, supra note 68.
---------------------------------------------------------------------------
    Senator Lieberman's and other legislative conclusions about the 
adverse impact of speculation were doubtless driven by the testimony of 
Michael W. Masters, Managing Member of Masters Capital Management, LLC, 
at the May 20 hearing.\76\ Mr. Masters showed that investment banks and 
hedge funds, for example, who were ``hedging'' their off exchange bets 
on energy prices on regulated exchanges were quite remarkably and 
inexplicably being treated by NYMEX, for example, and the CFTC as 
``commercial interests,'' rather than as the speculators they self 
evidently are.\77\ By lumping these investment banks and hedge funds 
with traditional commercial oil dealers, even U.S. fully regulated 
exchanges were not applying traditional speculation limits to the 
transactions engaged in by these speculative interests.\78\ Mr. Masters 
demonstrated beyond all doubt that a huge percentage of the trades in 
WTI futures, for example, were controlled by non-commercial 
interests.\79\ It is now clear that the CFTC in its pre-May 29 
assurances had never before examined the positions of these ``swaps 
dealers,'' because in that release it required these banks and hedge 
funds to report their trades to the CFTC and the CFTC committed ``to 
review whether classification of these types of traders can be improved 
for regulatory and reporting purposes.'' \80\
---------------------------------------------------------------------------
    \76\ Written Testimony of Michael Masters, Hearing Before the 
Committee on Homeland Security and Governmental Affairs, U.S. Senate, 
(May 20, 2008) available at http://hsgac.senate.gov/public/ _files/
052008Masters.pdf (last visited June 1, 2008).
    \77\ Id. at 7-8.
    \78\ Id. at 7.
    \79\ Id. at 8, 11.
    \80\ Press Release, U.S. Commodity Futures Trading Commission, CFTC 
Announces Multiple Energy Market Initiatives, available at http://
www.cftc.gov/newsroom/general pressreleases/2008/pr5503-08.html (last 
visited May 30, 2008).
---------------------------------------------------------------------------
    Indeed, Senator Bingaman, Chairman of the Senate Energy Committee 
and Natural Resources Committee in a May 27, 2008 letter to Acting 
Chairman Lukken, stated: ``[I] remain concerned that the Commission's 
assertions to date--discounting the potential role of speculation in 
driving up oil prices--have been based on a glaringly incomplete set of 
data.'' \81\ Senator Bingaman referenced not only the likelihood of the 
CFTC not having adequate data on foreign boards of trade who do 
business in the U.S. or the over-the-counter unregulated futures 
markets, but the CFTC's sanctioned practice of ``classify[ing] so-
called `swaps dealers'--including large investment banks [--] as 
`commercial' market participants, alongside physical hedgers such as 
oil companies and airlines, rather than as `non-commercial 
participants,'' the latter of whom would be subject to speculation 
limits.\82\ In other words, Senator Bingaman realized that when Messrs. 
Lukken and Harris had been assuring the Senate Energy and Natural 
Resources Committee that speculators played no role is the oil prices 
run up, they were not counting certain investment banks and hedge 
funds, for example, as speculators! \83\
---------------------------------------------------------------------------
    \81\ Letter from Senator Jeff Bingaman to Walter Lukken, Acting 
Chairman, CFTC (May 27, 2008) (emphasis added) available at http://
energy.senate.gov/public/index.cfm?FuseAction=
PressReleases.Detail&PressRelease_id=0fdd0eb4-4b1d-49f0-a3a2-
f89fd0e4b1d3&Month=5&Year
=2008&Party=0 (last visited June 1, 2008).
    \82\ Id.
    \83\ See Gene Epstein, Commodities: Who's Behind the Boom?, Barrons 
(March 31 2008) available at http://online.barrons.com/article/ 
SB120674485506173053.html?mod=b_hps_9_0001
_b_this_weeks_magazine_home_top&page=sp (last visited June 1, 2008) 
(demonstrating that a similar problem of miscategorizing investment 
banks and hedge funds as ``commercial'' farming interests exists in the 
agricultural futures markets).
---------------------------------------------------------------------------
    Finally, a bipartisan coalition of 22 Senators on May 23, 2008 sent 
a strongly worded letter to the CFTC asking that agency to show cause 
as to why the charade of treating the U.S.-owned ICE as a U.K. entity 
when that exchange is run out of Atlanta, Georgia and is trading the 
WTI U.S. delivered crude oil contract not be ended immediately as the 
underlying CFTC staff FBOT no action letters allow by their express 
terms.\84\ That Senate letter made clear that an unsatisfactory answer 
from the CFTC would very likely lead to further legislative 
diminishment of that agency's authority. Each of the above referenced 
factors almost certainly explain the dramatic change represented by the 
CFTC's May 29 release. The question remains whether the release is 
merely for appearances sake; or whether it truly represents seriousness 
on the part of the agency to finally investigate these matters.
---------------------------------------------------------------------------
    \84\ Letter from Twenty-Two Senators to Walter Lukken, Acting 
Chairman, CFTC (May 23, 2008), available at http://cantwell.senate.gov/
news/record.cfm?id=298325 (last visited June 1, 2008).
---------------------------------------------------------------------------
    There is evidence within the May 29 release that may call into 
question the sincerity of CFTC's new stance. First, the November 1999 
staff FBOT no action letter that the CFTC views as governing ICE's U.S. 
delivered energy trades expressly gives the CFTC the absolute right to 
collect immediately and directly any data it needs from either the FSA 
(the purported U.K. regulator of the Atlanta-based ICE) or from ICE 
itself.\85\ Ignoring the express language of the no action letters, the 
CFTC has now for the second time felt obliged to negotiate with FSA and 
ICE the right to obtain the very data it could collect under the no 
action letter.\86\ This unneeded subservience, especially to ICE, 
reflects an unwillingness by the CFTC to even use effectively the power 
expressly granted to it by its own no action letters.
---------------------------------------------------------------------------
    \85\ See supra notes 15-18 and accompanying text.
    \86\ Memorandum of Understanding Concerning Consultation, 
Cooperation and the Exchange of Information Related to Market 
Oversight, CFTC & FSA (2006) available at http://www.fsa.gov.uk/pubs/
mou/cftc.pd; Financial Services Authority, FSA signs regulatory 
cooperation agreement with the CFTC, (Nov. 20, 2006) available at 
http://www.fsa.gov.uk/pages/Library/ Communication/PR/2006/118.shtml 
(last visited June 1, 2008).
---------------------------------------------------------------------------
    Indeed, while the CFTC publicly announced its new initiative at 1 
PM on May 29,\87\ at 1:05 PM that afternoon ICE felt obliged to issue a 
press release announcing that it had ``facilitated'' the turning over 
of the data called for in the CFTC release.\88\ It is self evident that 
ICE, in its capacity as the second largest trader of WTI and as an 
unregulated U.S. exchange, was almost certainly going to be an entity 
of interest to the CFTC in its market investigation. The seeming 
subservience of the CFTC to ICE in negotiating with the exchange over 
the information the agency deems necessary for its investigation is 
akin to asking a key witness to an investigation whether and to what 
extent it will agree to turn over material relevant to the 
investigation. That is simply not the way in which serious 
investigation is conducted, especially when dealing with suspicions 
that manipulative activity may be found in these markets.
---------------------------------------------------------------------------
    \87\ Press Release, U.S. Commodity Futures Trading Commission, CFTC 
Announces Multiple Energy Market Initiatives, (May 29, 2008), available 
at http://www.cftc.gov/newsroom/general pressreleases/2008/pr5503-
08.html (last visited May 30, 2008).
    \88\ Press Release, Intercontinental Exchange, Ltd., ICE 
Facilitates Agreement to Provide Industry's Most Comprehensive 
Reporting for U.S. Energy Futures Contracts, (May, 29, 2008), available 
at http://ir.theice.com/releasedetail.cfm?ReleaseID=312956 (last 
visited June 1, 2008).
---------------------------------------------------------------------------
    Moreover, CFTC Commissioner Bart Chilton has acknowledged that the 
public announcement within the May 29 release raises that specter 
``some people to head for the paper shredder [.]'' \89\
---------------------------------------------------------------------------
    \89\ Tina Seeley, CFTC Targets Shipping, Storage in Oil 
Investigation (Update2), Bloomberg.com (May 30, 2008) available at 
http://www.bloomberg.com/apps/news?pid=20601087&sid=aGz
RMmD_b9MA&refer=home (last visited June 1, 2008).
---------------------------------------------------------------------------
    It is also important to note that the CFTC release makes clear that 
it has not, in fact, finalized its agreement to obtain all of the 
relevant data it needs from the FSA and ICE. In this regard, there are 
only ``near-term commitment[s]'' to obtain from the FSA and ICE ``more 
detailed identification of market end users'' and ``to provide improved 
data formatting so trading information can be seamlessly integrated 
into the CFTC's surveillance system[.]'' \90\ In other words, not only 
did the CFTC never know who the end users were trading WTI crude oil 
contracts on ICE (crucial information for determining which entities 
might be engaging in manipulative behavior) and not only did it not 
have any of the FSA data accessible for purposes of CFTC surveillance 
programs, it does not have this information today; it only has a ``near 
term commitment'' that the information will be provided. In this 
regard, the CFTC's assurance to Senator Lieberman only 2 weeks ago that 
there was no manipulation in these markets based a ``comprehensive 
analysis of actual position data of these traders'' seems to be nothing 
more than a flight of fancy since critical portions of that data are 
not even now within the possession of the CFTC after its much 
ballyhooed May 29 MOU with the FSA and ICE.
---------------------------------------------------------------------------
    \90\ Press Release, U.S. Commodity Futures Trading Commission, CFTC 
Announces Multiple Energy Market Initiatives, available at http://
www.cftc.gov/newsroom/general pressreleases/2008/pr5503-08.html (last 
visited May 30, 2008).
---------------------------------------------------------------------------
    My own view is that there can be no ``final'' commitment by FSA and 
ICE on these ``near term commitment'' points, because the United 
Kingdom's FSA is going to have to reconfigure (or more likely reinvent) 
the collection of its own data in order to be able to satisfy the 
CFTC's investigative needs in this regard. These ``near term'' failures 
in data collection only serve to highlight the total laxity of the FSA 
regulatory process as it applies to these markets; the extent to which 
CFTC analysis has been and will be uninformed ; and the absurdity of 
the CFTC's continuous charade that a U.S.-owned exchange (ICE) located 
in Atlanta and trading critically important U.S. delivered energy 
products (WTI) should be regulated by the United Kingdom, whose 
regulation of these markets is self evidently lacking by the latter's 
need to mask its inadequacies through ``near term commitments.''
    Yet, another factor within the CFTC's May 29 release evidences the 
weakness of relying on foreign regulators to police U.S. commodity 
trading. Among the new information required by the May 29 CFTC release 
is the requirement that ICE notify the CFTC when those who trade on ICE 
``exceed position accountability levels, as established by U.S. 
designated contract markets, for WTI crude oil contracts.'' \91\ In 
other words, because FSA does not have ``accountability levels'' and 
because ICE therefore does not establish them, the CFTC is requiring 
ICE to comply with accountability levels at its main competitor, NYMEX.
---------------------------------------------------------------------------
    \91\ Id.
---------------------------------------------------------------------------
    Needless to say, that is a highly circular way in which to bring an 
Atlanta-based exchange trading the U.S. delivered WTI contract, but 
regulated by the United Kingdom, under traditional and long established 
U.S. controls on excessive speculation and manipulation. Again, would 
it not be easier to simply require this Atlanta exchange to register in 
the United States? The ``Rube Goldberg'' quality of the CFTC's reliance 
on the FSA would be humorous were it not be for the fact that U.S. 
consumers are sinking under the weight of increasing gas prices that 
many respectable observers believe are caused in some substantial 
measure by outsized speculation and possible manipulation on ICE.
    Another important weakness of the CFTC release is that, while it 
tries to accommodate concerns about the inadequacy of the United 
Kingdom's regulation of ICE, the release does not address the fast 
growing problem of other foreign exchanges trading in the U.S. who are 
quickly moving into the U.S. delivered WTI contract. For example, as 
mentioned above,\92\ the Dubai Mercantile Exchange (DME) received a May 
2007 staff FBOT no action letter enabling that Dubai exchange to bring 
its terminals into the U.S. without registering as a CFTC regulated 
designated contract market. DME is joined in this endeavor by NYMEX, 
but its U.S. trading activities are regulated by the Dubai government.
---------------------------------------------------------------------------
    \92\ See supra note 46.
---------------------------------------------------------------------------
    James Newsome, the President of MYMEX, the former Chairman of the 
CFTC (2001-2004), and a member of the DME board of directors recently 
opined that ``he sees big opportunities for the DME and a huge 
potential for [DME] emerging as the derivatives trading hub of South 
Asia, Middle East and Africa region.'' \93\ He notes at the recent 
first anniversary of the DME WTI contract, the DME volumes ``are very 
similar to the volumes of the WTI . . . when [it was] launched'' on 
NYMEX itself.\94\
---------------------------------------------------------------------------
    \93\ Babu Das Augustine, Dubai `could emerge as a derivatives 
trading Hub', Gulfnews.com, May 16, 2008, available at http://
www.gulfnews.com/business/General/10213595.html (last visited June 1, 
2008).
    \94\ Id.
---------------------------------------------------------------------------
    The Dubai/NYMEX venture is the playing out of NYMEX's long 
threatened strategy to level the playing field with ICE, i.e., if an 
Atlanta-owned exchange can be regulated as if it were in the UK, a New 
York exchange will follow suit under the banner of an FBOT no action 
letter granted to a Dubai exchange. Of course, the CFTC May 29 release 
is careful to limit improved data collection only to ICE and does not 
address the parade of foreign exchanges to which the CFTC has offered a 
safe harbor from U.S. regulation.
    It is self evidently absurd that the American public can rest 
secure that the CFTC found in the DME no action letter, that Dubai's 
regulatory scheme is comparable to that of the U.S.\95\ The fact that 
the CFTC as recently as May 2007 could conclude that Dubai's regulation 
is in fact comparable to that in the U.S. simply demonstrates that 
there is not a foreign regulator in the world who would not satisfy the 
CFTC under that agency's comparability standard. In this regard, I am 
sure that the American consumers will take little comfort from an 
explanation that they are being protected from manipulation and 
excessive speculation driving up gas prices--not by U.S. regulators--
but by the Dubai government's oversight of trading of the U.S. 
delivered WTI contract on the DME's U.S. trading terminals. I do not 
envy any Member of Congress explaining that proposition to his or her 
constituents.
---------------------------------------------------------------------------
    \95\ Dubai Mercantile Exchange, CFTC No-Action Letter, 2007 CFTC 
Ltr. Lexis 6 (May 24, 2007).
---------------------------------------------------------------------------
    Finally, NYMEX President Newsome has further opined that ``[t]he 
reports on the role of speculators on oil prices are grossly 
exaggerated. If you look at the data on who is actually trading, the 
level of commercial participants remains 70 to 72 percent.'' Of course, 
as Michael Masters recently explained,\96\ Dr. Newsome's calculation 
treats investment banks and hedge funds laying off the risk of their 
off exchange swaps transactions on NYMEX as the same as a heating oil 
dealer using the WTI contract on NYMEX to hedge his business risk. If 
those banks and hedge funds were properly classified as speculators, 
about 70 percent of the trading on NYMEX would be speculative--not 
commercial. And, if you were to add all of the WTI trading on NYMEX, 
ICE, and the Dubai exchange, speculation might very well approach 80-90 
per cent of the WTI trades executed by U.S.-owned exchanges. By any 
objective assessment, the crude oil market is now overwhelmingly 
dominated by speculation, most of which is not subject to the age old 
controls imposed upon speculators in these markets. One can easily see 
then how Goldman Sachs, a huge trader in these markets itself, could 
confidently predict that oil will soon reach $200 a barrel.\97\
---------------------------------------------------------------------------
    \96\ See Masters, supra notes 76-79 and accompanying text.
    \97\ Neil King Jr. and Spencer Swartz, U.S. News: Some See Oil at 
$150 This Year--Range of Factors May Sustain Surge; $4.50-a-Gallon Gas, 
Wall St. J., May 7, 2008, at A3.
---------------------------------------------------------------------------
The Need to Expedite the FTC Investigation into Crude Oil Futures 
        Markets
    Soaring energy prices have infiltrated all sectors of the economy 
and they have drastically reduced the quality of life for millions of 
Americans. In a May 23,2008 letter to the CFTC, a bipartisan group of 
22 Senators stated the depth of economic emergency caused by the oil 
shock: ``The doubling of crude oil prices in 1 year is unprecedented in 
the century old history [of these markets]. With oil central to our 
Nation's economy and current standard of living, today's skyrocketing 
oil represents a massive new tax on American families and business . . 
.'' \98\ As Senator Bingaman, Chair of the Senate Energy and Natural 
Resources Committee, also reminded Acting CFTC Chairman Lukken last 
week, ``American families, farmers and businesses are currently 
struggling under the weight of record-setting fuel prices.'' \99\
---------------------------------------------------------------------------
    \98\ Letter from Twenty-Two Senators to Walter Lukken, Acting 
Chairman, CFTC (May 23, 2008), available at http://cantwell.senate.gov/
news/record.cfm?id=298325 (last visited June 1, 2008).
    \99\ Letter from Senator Jeff Bingaman to Walter Lukken, Acting 
Chairman, CFTC (May 27, 2008). Letter from Twenty-Two Senators to 
Walter Lukken, Acting Chairman, CFTC (May 23, 2008), available at 
http://cantwell.senate.gov/news/record.cfm?id=298325 (last visited June 
1, 2008).) (stating that Exxon Mobile executive has testified that the 
price of crude oil should be between $50 to $55 dollars per barrel 
based on supply and demand principles).
---------------------------------------------------------------------------
    Faced with years of inertia by the CFTC in policing the crude oil 
futures markets (or for that matter even recognizing any problem worthy 
of an investigation), Congress included within the Energy Independence 
and Security Act of 2007 (EISA),\100\ a provision expanding the power 
of the Federal Trade Commission (FTC) to combat price manipulation with 
respect to crude oil markets.\101\ The statute specifically provided 
that it was:
---------------------------------------------------------------------------
    \100\ Energy Independence and Security Act of 2007, Pub. L. No. 
110-140, 121 Stat. 1492 (2007).
    \101\ Id. at  811. Although the FTC has always had the power to 
provide consumer protection by preventing ``unfair methods of 
competition'' and ``deceptive acts'' that affected commerce, until the 
passage of the 2007 Act, it did not have the authority to target price 
manipulation directly. 15 U.S.C.  45 (2008).

        unlawful for any person, directly or indirectly, to use or 
        employ, in connection with the purchase or sale of crude oil 
        gasoline or petroleum distillates at wholesale, any 
        manipulative or deceptive device or contrivance, in 
        contravention of such rules and regulations as the Federal 
        Trade Commission may prescribe as necessary or appropriate in 
        the public interest or for the protection of United States 
        citizens.\102\
---------------------------------------------------------------------------
    \102\ Energy Independence and Security Act of 2007, Pub. L. No. 
110-140  811, 121 Stat. 1492 (2007).

    The 2007 FTC anti-manipulation legislation is virtually identical 
to 2005 legislation enacted by Congress requiring FERC to investigate 
and prohibit market manipulation in the natural gas markets.\103\ By 
January 2006, FERC issued a final rule under the 2005 legislation 
implementing its anti-manipulation provisions.\104\ Pursuant to that 
rulemaking, FERC resolved all major interpretive issues it viewed as 
arising under the 2005 legislation, including adopting the anti-
manipulation definitions within Section 10(b) of the Securities and 
Exchange Act of 1934 [and making it clear that its authority extended 
to investigating and crafting relief in the natural gas futures markets 
if manipulation of natural gas prices was found there (?)].\105\ In 
short, FERC has provided the FTC with the template for an investigative 
order under the virtually identical legislation governing the FTC's 
mandate.
---------------------------------------------------------------------------
    \103\ Energy Policy Act of 2005, Pub. L.No. 109-58, 119 Stat. 594 
(2005).
    \104\ 71 Fed. Reg. 4244 para. 6 (Jan. 26, 2006).
    \105\ Id. at para. 2.
---------------------------------------------------------------------------
    In July 2007, FERC issued a show cause order under its anti-
manipulation rule against the Amaranth Advisors hedge fund, alleging 
that Amaranth manipulated NYMEX natural gas futures contracts to impact 
the price of those contracts.\106\ In so doing, FERC made it clear that 
the term within the legislation making it ``unlawful for any person, 
directly or indirectly, to use or employ, in connection with the 
purchase'' of natural gas included the authority to investigate and 
issue appropriate relief within the natural gas futures markets, 
because those markets are ``in connection with'' the purchase of the 
commodity in question. FERC has now completed over 64 investigations 
into these markets, reaching settlements in a substantial portion of 
those cases.
---------------------------------------------------------------------------
    \106\ 120 F.E.R.C. P. 61085, 2007 F.E.R.C. Lexis 163 (2007).
---------------------------------------------------------------------------
    In sum, FERC has used its 2005 legislative authority after which 
the 2007 FTC crude anti-manipulation legislation was modeled to resolve 
all major issues about the scope of its mandate, including a definition 
for market manipulation and a clear understanding that, if that 
manipulation emanates within futures markets, FERC has the statutory 
authority to investigate and regulate therein. Therefore, the FTC has a 
readymade model order, resolving many critical issues about the scope 
of its authority under the 2007 legislation, which should have enabled 
it to move quickly to determine whether the unbearably high prices 
experienced in the crude oil markets by U.S. consumers are related 
exclusively to market fundamentals or, in crucial part, to trading 
malpractices.
The National Emergency in the Petroleum Markets Authorizes to FTC to 
        Move Faster
    Instead of taking swift and decisive action to address the growing 
threat of fast rising crude oil, gasoline and heating oil prices, the 
FTC opted to employ a leisurely administrative route that, unless 
adjusted as suggested below, will mean that a rule governing 
investigation under the 2007 crude oil anti-manipulation legislation 
will not be in place until this coming fall at the earliest. Rather 
than issuing a proposed rule based on the model established by FERC in 
the natural gas markets, the FTC instituted an advanced notice of 
proposed rulemaking (ANOPR) with the comment period to close on June 6, 
2008.\107\ The ANOPR is 39 pages long and it raises in a most highly 
academic fashion many of the issues long ago confronted and resolved in 
2005-2006 by FERC in the natural gas context.
---------------------------------------------------------------------------
    \107\ 16 C.F.R. Part 317 (2008).
---------------------------------------------------------------------------
    Moreover, picking up the signal that time is not of the essence, 
the American Petroleum Institute (API), represented by the Covington & 
Burling law firm, has already requested an extension of the June 6 
ANOPR deadline, claiming that the issues are too difficult to resolve 
in anything less than a 90 period.\108\ If this extension were granted, 
the comment period for the ANOPR would not even end until late summer. 
At that juncture and pace, the FTC would then analyze the ANOPR 
comments before it even issued a proposed rule with its own [30] day 
comment period. Under this schedule (if not extended by further 
requests for more time), months would pass before the promulgation of 
the final rule at which time the FTC would only then begin its 
investigation.
---------------------------------------------------------------------------
    \108\ Letter from the American Petroleum Institute to Donald Clark, 
Secretary, U.S. Federal Trade Commission (May 19, 2008) available at 
http://www.ftc.gov/os/comments/market manipulation/
080519ampetrolinstreqeot.pdf (last visited May 31, 2008).
---------------------------------------------------------------------------
    To be sure, in the absence of a full blown emergency, agency 
rulemaking requires a notice and comment period on a proposed rule, 
with the discretion to precede the proposed rule with an ANOPR to flesh 
out novel issues in aid of developing the proposed rule. However, the 
Administrative Procedure Act provides critically important exceptions 
to these procedures in well defined exigent circumstances. For example, 
the APA specifically provides that the notice and comment requirements 
can be bypassed or short circuited when, ``the agency for good cause 
finds (and incorporates the finding and a brief statement of reasons 
therefore in the rules issued) that notice and public procedure thereon 
are impracticable, unnecessary, or contrary to the public interest.'' 
\109\ Therefore, when an agency faces emergencies or situations where 
delaying for notice and comment would seriously harm the public 
interest, the agency can promulgate a final rule without notice and 
comment, especially when the critical issues have already been resolved 
under an identical companion statute by another Federal agency charged 
with the identical investigative mission in highly related markets and 
by comments received by the FTC pursuant to the FTC's existing 
ANOPR.\110\
---------------------------------------------------------------------------
    \109\ 5 U.S.C.  553(b)(B) (2008).
    \110\ See id.; Edison Electric Institute, et al., v. EPA, 821 F.2d 
714, 720 (D.C. Cir. 1987) (``[T]here was a need for immediate 
action.''); Chamber of Commerce v. SEC, 443 F.3d 890, 908 (D.C. Cir. 
2006) (exception to notice and comment permitted ``in emergency 
situations'' or where ``delay would result in serious public harm'') 
(dicta) (citing cases).
---------------------------------------------------------------------------
    The present crude oil and gas price shocks presents precisely the 
circumstances for which the APA exception was intended. Sky rocketing 
oil, gasoline, and heating oil prices have placed a stranglehold on the 
American economy and every American consumer. George Soros recently 
warned that, if left unattended, the oil price crisis (which he views 
as being grounded in excessive speculation) will drag the United States 
into the most serious full blown recession since the end of World War 
II.\111\ Surely the present crisis would allow the FTC to short circuit 
full blown APA procedures. Indeed, after receiving comments on the 
ANOPR, the FTC could model an interim final rule based on those 
comments and the tailor made companion FERC template. The FTC's 
investigation could at least proceed under the interim rule while it 
takes notice and comment on that interlocutory order. If the FTC acts 
expeditiously, it may stave off economic chaos by bringing discipline 
to what many sophisticated economists and market observers believe are 
unnecessarily chaotic markets driven by a high level of speculative 
manipulation.
---------------------------------------------------------------------------
    \111\ Edmund Conway, George Soros: rocketing oil price is a bubble, 
Daily Telegraph (May 27, 2008) available at http://www.telegraph.co.uk/
money/main.jhtml?xml =/money/2008/05/26/cnsoros126.xml (last visited 
May 29, 2008).
---------------------------------------------------------------------------
    Indeed, when FERC went through its rulemaking process on suspected 
manipulation leading to fast rising natural gas prices, it expedited 
its proceeding.\112\ In that case, FERC ``balanced the necessity for 
immediate implementation of this Final Rule against the principles of 
fundamental fairness'' and determined that the persistent high energy 
prices could lead to opportunities for price manipulation.\113\ FERC 
concluded that it ``would be contrary to the public interest to delay 
regulations that implement Congressional intent to prohibit 
manipulation in energy markets[;]'' implementing a Final Rule would 
protect energy markets from manipulation.\114\ Again, because the FTC 
legislation is nearly identical to that enactment authorizing FERC, it 
is certain that Congress expected the FTC to follow the example set by 
FERC. Given the self-evident nature of the emergency before us, the 
harm that delay could cause the public, and the example of effective 
response given by FERC, the FTC should greatly expedite its rulemaking 
process in order to bring stability to the gas and oil markets.\115\
---------------------------------------------------------------------------
    \112\ Prohibition of Energy Market Manipulation, 114 F.E.R.C. 
P61,047, 61 (F.E.R.C. 2006).
    \113\ Id.
    \114\ Id.
    \115\ If absolutely necessary the FTC could propose an interim rule 
for investigation after the ANOPR period has closed and then expedite 
the rulemaking process through the APA's  553(d), until reaching a 
final rule.
---------------------------------------------------------------------------
The FTC's Investigation of the Crude Oil Markets Cannot Be Blocked by 
        the CFTC
    In its ANOPR, FERC has posed the question of the degree to which 
the 2007 statutory mandate permits it to overlap the jurisdiction of 
the CFTC into the crude oil futures markets. Doubtless, the CFTC's 
sudden reversal of position in announcing its own investigation into 
these markets on May 29, 2008 was intended to aggravate that concern on 
the part of the FTC.\116\
---------------------------------------------------------------------------
    \116\ See supra notes 71-74 and accompanying text.
---------------------------------------------------------------------------
    An effort was made to thwart FERC in its investigation of the 
natural gas futures markets pursuant to the 2005 legislation by 
claiming it was infringing on the province of the CFTC. In CFTC v. 
Amaranth Advisors,\117\ Amaranth tried to enjoin FERC from proceeding 
with its administrative action because it could face the possibility of 
having to defend itself in two different proceedings pertaining to the 
natural gas futures markets.\118\ The court refused to enjoin the FERC 
investigation, by explaining, inter alia, that Congress expressly 
envisioned that there would be overlap between the enforcement actions 
of these two agencies.\119\
---------------------------------------------------------------------------
    \117\ 523 F.Supp.2d 328 (S.D.N.Y. 2007).
    \118\ Id. at 328-29.
    \119\ Id. at 332.
---------------------------------------------------------------------------
    Important Members of Congress have also weighed in when the CFTC 
has attempted to preempt FERC's examination of the natural gas futures 
markets. For example, in a recent hearing before the Subcommittee on 
Oversight and Investigations of the House Committee on Energy and 
Commerce, the Ranking Member Joe Barton (R-TX) (who was the Committee 
Chair when the 2005 statute was passed) stated, ``I'm also disappointed 
to see that CFTC has challenged FERC's authority to investigate and 
pursue the energy market manipulators despite the Congress's explicit 
grant of authority to FERC in the Energy Policy Act of 2005.'' \120\ 
Acting Chairman Lukken replied that the CFTC had opposed FERC action 
because the Commodity Exchange Act had conferred exclusive jurisdiction 
over these contracts to the CFTC.\121\ Rep. Barton retorted,
---------------------------------------------------------------------------
    \120\ Rep. Joe Barton, Subcommittee on Oversight and 
Investigations, Statements during the Energy Speculation: Is Greater 
Regulation Necessary to Stop Price Manipulation? (Dec. 12, 2007) 
(emphasis added).
    \121\ Walter Lukken, Acting Chairman CFTC, Statements during the 
Energy Speculation: Is Greater Regulation Necessary to Stop Price 
Manipulation? (Dec. 12, 2007).

        Well, then there's no way you can have exclusive jurisdiction 
        with this [2005] statutory authority on the books. And what I 
        want to inform you of, as the acting chairman, is that this 
        wasn't something serendipitous or inadvert[ent]. It was put in 
        directly because of what since has transpired. And the--Mr. 
        Kelliher [FERC Chairman] and his compadres at the FERC are 
        doing exactly, or at least attempting to do exactly what we 
        hoped they would do, which is work with your agency but use 
        their own authorities to ferret out the bad actors and try to 
        make our markets more open and transparent and accessible in a 
        nonbiased way to any willing participant.\122\
---------------------------------------------------------------------------
    \122\ Barton, supra note 120.

---------------------------------------------------------------------------
    Rep. Barton elaborated further:

        So I'm--I don't see how the--your agency or the courts can 
        rule, unless they assume that the Members of Congress who 
        passed this didn't know what we were talking about and didn't 
        understand the English language. But I just, you know, I want 
        to put on the record at this oversight hearing that this was--
        this particular section was done at my express request because 
        of concerns I had at the time about speculation in the oil and 
        gas markets so that we could give the FERC some authority, 
        which was ambiguous at that time.\123\
---------------------------------------------------------------------------
    \123\ Id.

    Rep. Barton's statements leave little room for doubt that both FERC 
(under the 2005 legislation) and the FTC (under the 2007 legislation 
modeled after the 2005 statute) have the authority to examine the role 
futures markets play in manipulating the natural gas markets (in the 
case of FERC) and the petroleum markets (in the case of the FTC).
    Finally, the mere fact that the CFTC has begun its own 
``investigation'' into the current price calamity is no reason for the 
FTC to delay its own inquiry.\124\ As Rep. Barton said, ``This is not 
an area that we have too many regulators and too many overseers.'' 
\125\ The enormity of the economic chaos that looms in spiking crude 
oil prices imperils both the stability of the global economy, as well 
as the American people. Given the magnitude of these issues, both 
agencies should cooperate to work simultaneously in this area.
---------------------------------------------------------------------------
    \124\ See supra notes 117-119 and accompanying text.
    \125\ Barton, supra note 120.
---------------------------------------------------------------------------
The FTC Is Required to Adopt SEC's Definition of Manipulation
    In its ANOPR, the FTC includes a considerable discussion pertaining 
to the standard it should adopt in determining whether conduct is 
manipulative. Once again, this issue has been settled under the 2005 
legislation as explained in FERC's final investigative order. Congress 
passed the FERC legislation in 2005 in direct response to the scandal 
in the natural gas markets that decimated the Western electricity 
markets in 2000 and 2001. The 2005 provision was modeled on the 
securities laws, and FERC's final order under that statute notes that 
the anti-manipulation provisions in the Energy Policy Act of 2005 
``closely track'' section 10b of the Securities Exchange Act of 
1934.\126\ Moreover, both statutes ``specifically dictate that the 
terms `manipulative or deceptive device or contrivance' are to be used 
`as those terms are used in section 10(b) of the Securities Exchange 
Act of 1934.' '' \127\ FERC therefore patterned its own rule after the 
SEC's 10b-5 and said it would interpret its own rules ``consistent with 
analogous SEC precedent that is appropriate under the circumstances.'' 
\128\
---------------------------------------------------------------------------
    \126\ Prohibition of Energy Market Manipulation, 114 F.E.R.C. 
P61,047; 2006 FERC LEXIS 105 (Jan 19, 2006).
    \127\ Id.
    \128\ Id.
---------------------------------------------------------------------------
    Similarly, Congress modeled the FTC's new 2007 anti-manipulation 
provision on 10(b) of the Securities Exchange Act of the 1934 and Rule 
10b-5 to once again make it clear (as was the case with FERC) that the 
FTC must use the extensive securities precedent to guide its 
manipulation investigations in the petroleum markets. For example, 
``manipulative or deceptive device or contrivance'' has clearly been 
defined by the SEC and adopted by FERC, and have also been interpreted 
by the courts. The courts have established that this standard covers 
``knowing or intentional misconduct'' and not price changes caused by 
negligence or natural market forces. Rather, the SEC definition is 
designed to prevent fraudulent or manipulative conduct that affect 
market prices ``that are intended to mislead . . . by artificially 
affecting market activity.'' \129\ The Supreme Court has interpreted 
the phrases ``manipulative or deceptive'' in conjunction with ``device 
or contrivance,'' to be applicable to intentional conduct.\130\ The SEC 
has broadly interpreted the securities laws to attack ``the full range 
of ingenious devices that might be used to manipulate securities 
prices.'' \131\
---------------------------------------------------------------------------
    \129\ Santa Fe Industries v. Green, 430 U.S. 462, 476 (1977); Mobil 
Corp. v. Marathon Oil Co., 669 F.2d 366, 374 (6th Cir. 1981) (holding 
that SEC is empowered to prevent manipulation of markets ``by 
artificial means . . . unrelated to the natural forces of supply and 
demand.'').
    \130\ Ernst & Ernst, 425 U.S. at 197, 199.
    \131\ Santa Fe Industries, 430 U.S. at 476.
---------------------------------------------------------------------------
    Accordingly, the FTC (as is true of FERC and the SEC) is not 
required to demonstrate reliance, loss causation, or damages, because 
``the Commission's duty to enforce the remedial and preventative terms 
of the statute in the public interest, and not merely to police those 
whose plain violations have already caused demonstrable loss or 
injury.'' \132\
---------------------------------------------------------------------------
    \132\ See, e.g., SEC v. Credit Bancorp, Ltd., 195 F.Supp2d 475, 
490-91 (S.D.N.Y. 2002) quoting Berko v. SEC, 316 F.2d 137, 143 (2d Cir. 
1963) citing SEC v. North American Research & Dev. Corp., 424 F.2d 63, 
84 (2d Cir. 1970)(reliance not an element of a Rule 10-b(5) claim in 
the context of an SEC proceeding).
---------------------------------------------------------------------------
The FTC Is Free to Investigate the Futures Trading Subsidiaries of 
        Banks
    The FTC is specifically has general authority ``to prevent persons, 
partnerships, or corporations . . . from using unfair methods of 
competition in or affecting commerce and unfair or deceptive acts or 
practices in or affecting commerce.'' \133\ However, while the FTC has 
broad authority to protect commerce, as it has noted in the ANOPR, it 
explicitly prohibited from regulating, inter alia, ``banks.'' \134\
---------------------------------------------------------------------------
    \133\ 15 U.S.C.  45(a)(2) (2008).
    \134\ Id.
---------------------------------------------------------------------------
    As has been noted above, investment banks are prime players in the 
crude oil future markets. I anticipate that a question will be raised 
about whether the FTC can investigate those institutions.
    The FTC's authorizing legislation does not provide a definition of 
a ``bank;'' \135\ rather, it cross references another section of the 
statute, which is concerned with FTC enforcement.\136\ This section 
provides a list of those institutions that qualify as ``banks,'' and 
makes it clear that the term relates to depository institutions 
registered as in that capacity with Federal banking regulators.\137\
---------------------------------------------------------------------------
    \135\ 15 U.S.C.  44 (2008).
    \136\ See 15 U.S.C.  57(a)(f)(2) (2008).
    \137\ See id. The statute specifically mentions the following 
institutions as being considered banks:

    (A) national banks and Federal branches and Federal agencies of 
foreign banks, by the division of consumer affairs established by the 
Office of the Comptroller of the Currency; (B) member banks of the 
Federal Reserve System (other than national banks), branches and 
agencies of foreign banks (other than Federal branches, Federal 
agencies, and insured State branches of foreign banks), commercial 
lending companies owned or controlled by foreign banks, and 
organizations operating under section 25 or 25(a) [25A] of the Federal 
Reserve Act [12 USCS  601 et seq. or  611 et seq.], by the division 
of consumer affairs established by the Board of Governors of the 
Federal Reserve System; and (C) banks insured by the Federal Deposit 
Insurance Corporation (other banks referred to in subparagraph (A) or 
(B)) and insured State branches of foreign banks, by the division of 
consumer affairs established by the Board of Directors of the Federal 
Deposit Insurance Corporation. Id.

    The statute also presents a cross reference for additional guidance 
on definitions to the Banks and Banking portion of the United States 
Code. Id.; 15 U.S.C.  1813 (2008) (listing its own definitions of the 
word ``bank''). It is also worth noting that these definitions are 
immediately follow by a section entitled ``Definitions relating to 
depository institutions.'' 15 U.S.C.  1813(c) (2008). This reinforces 
the idea that the types of institutions being excluded are institutions 
of which ``a substantial portion of the business of which institution 
consists of receiving deposits or exercising fiduciary powers. . . .'' 
69 Am. Jur. 2d Securities Regulation-Federal  338. See Miller v. U.S. 
Bank of Washington, 865 P.2d 536, 541 (1994).
---------------------------------------------------------------------------
    However, even if non-depository institutions, such as Morgan 
Stanley or Goldman Sachs, are for some reason deemed to be ``banks'' 
for purposes of FTC regulation, the futures trading done by those 
institutions are executed through subsidiaries neither registered with 
the banking regulators nor with the SEC.\138\
---------------------------------------------------------------------------
    \138\ See Morgan Stanley, Annual Report (Form 10-K), at 114, 148, 
157, 202 (Nov. 30, 2007); The Goldman Sachs Group, Inc., Annual Report 
(Form 10-K), at 17-18, 80, 189-92 (Nov. 30, 2007).
---------------------------------------------------------------------------
    Finally, to the extent that the finds that a ``bank'' is involved 
in manipulative activity within the crude oil markets, courts have 
ruled that the FTC has investigatory power with regard to banks, even 
if enforcement activities with regard to those institutions are beyond 
the Commission's authority. In FTC v. Rockefeller,\139\ the FTC brought 
suit to enforce subpoenas it had issued to various banks in order to 
conduct an energy-related investigation.\140\ The banks sought to quash 
the subpoenas, arguing that the information sought ran afoul of the 
``bank'' exemption within the FTC's governing statute.\141\ The court 
first determined that the FTC's authority to ``conduct an investigation 
of the energy industry is undisputed.'' \142\ The court ultimately held 
that the FTC was lawfully permitted to demand information from the 
banks there in pursuit of its statutory obligation to investigate the 
energy industry.\143\ For all of these reasons, the FTC should be urged 
by this Committee to fulfill aggressively the 2007 Congressional 
mandate stop any manipulative practices within the petroleum markets, 
including activity within the crude oil futures markets distorting 
crude oil prices. The path for such an investigation has already been 
well marked by FERC. The FTC should use all of the powers available to 
it to promulgate its rule and begin it investigation expeditiously. The 
stability of the American economy demands nothing less.
---------------------------------------------------------------------------
    \139\ FTC v. Rockefeller, 441 F.Supp. 234 (S.D.N.Y. 1977).
    \140\ Id. at 236.
    \141\ Id. at 237. The banks contended that because they were exempt 
from the FTC jurisdiction, the subpoenas issued by the FTC were 
invalid. Id. at 240.
    \142\ Id. at 240.
    \143\ Id.

    Senator Cantwell. Thank you.
    Next, we will hear from Gerry Ramm, President of Inland Oil 
Company, and on--speaking on behalf of the Petroleum Marketers 
Association.
    I would like to extend a special welcome to Mr. Ramm, since 
he comes from Ephrata, Washington. Thank you very much for 
being here.

          STATEMENT GERRY RAMM, PRESIDENT, INLAND OIL

         COMPANY, EPHRATA, WASHINGTON ON BEHALF OF THE

           PETROLEUM MARKETERS ASSOCIATION OF AMERICA

    Mr. Ramm. Thank you, Madam Chairman and Members of the 
Committee. I appreciate the opportunity to provide some insight 
on this extreme volatility and record-setting prices that we've 
seen in the recent months in the energy commodity markets.
    I am with, and representing, the Petroleum Marketers 
Association of America. We are a national federation of 46 
states and regional associations representing 8,000 independent 
fuel marketers and almost all the heating oil dealers in the 
Nation.
    Excessive speculation on energy trading facilities is the 
fuel that is driving this runaway train in crude oil prices 
today. Excessive speculation is being driven by what Michael 
Masters, of Masters Capital Management, refers to as ``index 
speculators,'' as compared to traditional speculators. ``Index 
speculators'' are institutional investors, such as corporate 
and government pension funds, sovereign wealth funds, and 
university endowments. These players are sometimes referred to 
as noncommercial or nonphysical players.
    Index speculators have driven the demand, which does not 
correlate to the physical--current physical demand. Even though 
the rate of increase in China's demand, and, in fact, the 
world's trade--or, the world's rate of increase in demand, has 
slowed in recent years, the price of crude oil has almost 
tripled in that same period. Isn't it interesting that the 
largest increase in demand has been speculative trading, which 
has increased three times in recent years? Is the runup in 
prices due to physical demand or speculative demand created by 
these indexes?
    This rise in crude-oil prices, which has reached $135 a 
barrel recently, has dragged with it every single refined 
petroleum product, especially heating oil and diesel. And, in 
May, heating oil and diesel went up as much as 80 cents a 
gallon in that 1 month. This price spike occurred while heating 
oil inventories remained at or near their 5-year average. While 
energy commodities continue to skyrocket, petroleum marketers 
and consumers are forced to pay excessively high energy prices.
    We have come to the conclusion that excessive speculation 
on energy commodity markets has driven up the price of crude 
oil, and, consequently, all refined petroleum products, without 
the supply and-demand fundamentals to justify the recent runup.
    Large purchases of crude oil futures contracts by 
speculators having consequence created an additional demand for 
oil, which drives up the price of the oil futures deliveries.
    The October 2007 GAO report determined that futures market 
speculation could have an upward effect on prices. However, it 
was hard to quantify, because not all the numbers are reported 
to regulatory agencies. We must have full transparency. 
Speculators who have no contact with the physical commodity are 
trading on over-the-counter markets and foreign boards of trade 
which, due to a series of legal and administrative loopholes, 
are virtually opaque. Because these are unregulated trades, or 
``dark markets,'' there is no record. If these trades were 
manipulative in nature, it would increase the cost to the 
American consumer, it would increase the cost of the commodity 
sold. Such trading would leave no public data, and there would 
be no fingerprints.
    By passing the farm bill, you helped to take a first step 
in bringing transparency to the energy trading markets, but the 
CFTC has provided ``no action'' letters to foreign boards of 
trade, which subsequently now does not give CFTC regulatory 
authority over those trading platforms.
    Why would the CFTC not want authority over the trading 
platforms that are operating within the United States and 
trading U.S.-delivered commodities? We suggest that Congress 
and administration consider closing the administrative foreign 
board of trades loophole by revoking the CFTC ``no action'' 
letters to oversee energy trading platforms, raising margin 
requirements or the necessary collateral for noncommercial 
entities, or so-called ``nonphysical players.'' Currently, 
margins in the futures trading are as low as 3 percent for some 
contracts. To buy U.S. equities, margin requirements are a 
minimum of 50 percent, requiring noncommercial traders to have 
the ability to take some physical delivery of the product, to 
provide adequate funding for the CFTCs so that they can do 
their job, PMAA strongly supports the free exchange of 
commodity futures on an--open, well-regulated, and transparent 
exchanges that are subject to the rules of law and 
accountability.
    Reliable futures markets are crucial to the entire 
petroleum industry. Let's make sure that these markets are 
competitively driven by the fundamentals of supply and demand. 
We and our customers need our public officials, including the 
Congress and the CFTC, to take a stand against the loopholes--
or the loopholes that are artificially inflating energy prices.
    I want to thank you for the opportunity to speak to you 
today, and I'm available for any questions that you may have.
    [The prepared statement of Mr. Ramm follows:]

   Prepared Statement of Gerry Ramm, President, Inland Oil Company, 
Ephrata, Washington on behalf of the Petroleum Marketers Association of 
                                America
    Honorable Chairman Inouye and Ranking Member Stevens and 
distinguished Members of the Committee, thank you for the invitation to 
testify before you today. I appreciate the opportunity to provide some 
insight on the extreme volatility and record setting prices seen in 
recent months on the energy commodity markets.
    I am an Officer on the Petroleum Marketers Association of America's 
(PMAA) Executive Committee. PMAA is a national federation of 46 state 
and regional associations representing over 8,000 independent fuel 
marketers that collectively account for approximately half of the 
gasoline and nearly all of the distillate fuel consumed by motor 
vehicles and heating equipment in the United States. I also work for 
Inland Oil Company in Ephrata, Washington. My Dad started Inland Oil 
Company in 1946 after he returned from duty in World War II. Today we 
operate seven gas stations and convenience stores and we also supply 
fuel to eight independent dealers. Also, supporting my testimony here 
today is the New England Fuel Institute who represents over 1,000 
heating fuel dealers in the New England area.
    Last year, gasoline and heating oil retailers saw profit margins 
from fuel sales fall to their lowest point in decades as oil prices 
surged. The retail motor fuels industry is one of the most competitive 
industries in the marketplace, which is dominated by small, independent 
businesses. Retail station owners offer the lowest price for motor 
fuels to remain competitive, so that they generate enough customer 
traffic inside the store where station owners can make a modest profit 
by offering drink and snack items. Because petroleum marketers and 
station owners must pay for the inventory they sell, their lines of 
credit are approaching their limit due to the high costs of gasoline, 
heating oil and diesel. This creates a credit crisis with marketers' 
banks, which creates liquidity problems and may force petroleum 
marketers and station owners to close up shop.
    Excessive speculation on energy trading facilities is the fuel that 
is driving this runaway train in crude oil prices. The rise in crude 
oil prices in recent weeks, which reached $135.09 on May 22, 2008, has 
dragged with it every single refined petroleum product, especially 
heating oil. According to the Department of Energy, the cost of crude 
accounts for roughly 73 percent of the pump price, up from 62 percent 
in January 2008.\1\ Wholesale heating oil prices from March 5, 2008-May 
28, 2008 have risen from $2.97 to $3.81.\2\ The spike comes despite 
warmer temperatures in the Northeast and the end of the heating oil 
season. Interestingly, Colonial Group Inc. which provides wholesale/
retail petroleum fuels announced May 7, 2008, that it had 150,000 
barrels of surplus heating oil available for auction. That same day 
heating oil futures set yet another record high with a 9.3 cent gain at 
$3.37 a gallon along with temperatures averaging in the upper 70s in 
the Northeast. The data doesn't add up.
---------------------------------------------------------------------------
    \1\ Energy Information Administration, ``Gasoline and Diesel Fuel 
Update,'' April 2008.
    \2\ Energy Information Administration, ``U.S. No. 2 Heating Oil 
Wholesale/Resale Prices,'' March 5-May 28, 2008.
---------------------------------------------------------------------------
    Large purchases of crude oil futures contracts by speculators have 
created an additional demand for oil which drives up the prices of oil 
for future delivery. This has the same effect as the additional demand 
for contracts for delivery of a physical barrel today drives up the 
price for oil on the spot market. According to the Department of 
Energy, the amount of petroleum products shipped by the world's top oil 
exporters fell 2.5 percent last year, despite a 57 percent increase in 
prices.
    According to a 2006 Senate Permanent Subcommittee on Investigations 
bipartisan report by Chairman Carl Levin (D-MI) and Ranking Member Norm 
Coleman (R-MN) entitled, The Role of Market Speculation in Rising Oil 
and Gas Prices: A Need to Put the Cop Back on the Beat, ``Several 
analysts have estimated that speculative purchases of oil futures have 
added as much as $20-$25 per barrel to the current price of crude oil, 
thereby pushing up the price of oil from $50 to approximately $70 per 
barrel.'' Who would have thought that crude oil futures would rise to 
over $130 a barrel?
    Three weeks ago, Michael Masters, Managing Member and Portfolio 
Manager of Masters Capital Management, LLC, a hedge fund, argued before 
the Senate Committee on Homeland Security and Government Affairs that 
institutional investors are the cause of the recent run-up in commodity 
prices. Institutional investors are buying up all the commodity 
contracts (going long), especially energy commodities, and are not 
selling, thereby causing the demand for contracts to increase and 
putting further pressure on commodity prices. Institutional investors 
allocate a portion of their portfolios into commodities since they are 
posting solid returns rather than traditional investments like stocks 
and bonds.
    Since commodities futures markets are much smaller than equity 
markets, billions invested into commodity markets will have a far 
greater impact on commodity prices than billions of dollars invested in 
equity markets. Masters stated that while some economists point to 
China's demand for crude oil as the cause for the recent rise in energy 
costs, he disclaims that assumption. In fact, Masters' testimony 
highlights a Department of Energy report that annual Chinese demand for 
petroleum has increased over the last 5 years by 920 million barrels. 
Yet, over the same five-year period, index speculators' demand for 
petroleum futures has increased by 848 million barrels, thus the 
increase in demand from institutional investors is almost equal to the 
increase in demand from China! Wouldn't this demand by institutional 
investors have some effect on prices?
    Also, many economists and financial analysts report that the weak 
dollar has put pressure on crude oil prices. While the weak dollar 
explanation is partly true because crude oil is denominated in dollars 
which reduces the price of oil exports for producers, leading them to 
seek higher prices to make up for the loss, this does not justify crude 
oil's move beyond $130 a barrel. On May 1, 2008, the front month NYMEX 
WTI crude oil contract closed just under $113 per barrel. Three weeks 
later the same front month NYMEX WTI contract was trading at over $132 
per barrel. In that same period of time the dollar traded between $1.50 
to $1.60 against the Euro. While the Euro strengthened against the 
dollar, it doesn't justify that crude oil should have increased $19. 
There were no significant supply disruptions during this time period.
    U.S. destined crude oil contracts could be trading DAILY at a rate 
that is multiple times the rate of annual consumption, and U.S. 
destined heating oil contracts could be trading daily multiple times 
the rate of annual consumption. Imagine the impact on the housing 
market if every single house was bought and sold multiple times every 
day. An October 2007 Government Accountability Office report, Trends in 
Energy Derivatives Markets Raise Questions about CFTC's Oversight, 
determined that futures market speculation could have an upward effect 
on prices; however, it was hard to quantify the exact totals due to 
lack of transparency and recordkeeping by the CFTC.
    To be able to accurately ``add up'' all of the numbers, you must 
have full market transparency. This is perhaps the biggest barrier to 
obtaining an accurate percentage calculation of the per barrel cost of 
non-commercial speculative investment in crude oil, natural gas and 
other energy products. Much of the non-commercial (i.e., speculators 
that have no direct contact with the physical commodity) involvement in 
the commodities markets is isolated to the over-the-counter markets and 
foreign boards-of-trade, which, due to a series of legal and 
administrative loopholes, are virtually opaque.
    PMAA would like to thank Congress for passing the Farm Bill (H.R. 
2419), specifically, Title XIII, which will bring some transparency to 
over-the-counter markets. However, the Farm Bill is only a first step.
    What the Farm Bill language does not do is repeal a letter of ``no 
action'' issued by the CFTC to the London based International Petroleum 
Exchange (IPE) which was subsequently purchased by the Intercontinental 
Exchange (ICE). The letter of no action was issued since the IPE was 
regulated by the United Kingdom's Financial Services Authority (FSA), 
which theoretically exercised comparable oversight of the IPE as CFTC 
did to NYMEX. Recently, however, whether or not the FSA exercises 
``comparable oversight'' was brought into question by CFTC Commissioner 
Bart Chilton. Congress needs to investigate whether or not oversight by 
foreign regulators is ``comparable.'' Currently, FSA doesn't monitor 
daily trading to prevent manipulation, publish daily trading 
information, or impose and enforce position limits that prevent 
excessive speculation.
    ICE is the exchange most often utilized by those who exploit the 
Enron Loophole. ICE is a publicly traded exchange whose shareholders 
are primarily investment funds. In recent years ICE's trading volume 
has exploded at the expense of the regulated NYMEX. According to the 
Securities and Exchange Commission filings, traders on ICE made bets on 
oil with a total paper value of $8 trillion in 2007, up from $1.7 
trillion in 2005.\3\ ICE purchased IPE and will continue to claim 
exemptions on various contracts whether or not the Farm bill becomes 
law since they effectively have a ``get out of jail free card.''
---------------------------------------------------------------------------
    \3\ Herbst, Moira; Speculation--but Not Manipulation: Financial 
News, Business Week, May 30, 2008.
---------------------------------------------------------------------------
    While PMAA applauds the recent CFTC announcement that it will 
expand information sharing with the U.K.'s Financial Services Agency 
and ICE Futures Europe to obtain large trader positions in the West 
Texas Intermediate crude oil contract, more needs to be done to prevent 
and deter market manipulation on all foreign boards of trade.
    Congress and the Administration might also consider:

        1. Closing the Administrative Foreign Boards-of-Trade Loophole 
        via review or elimination of CFTC ``no action letters'' to 
        overseas energy trading platforms. PMAA supports any 
        legislative remedy that would ensure that all off-shore 
        exchanges be subject to the same level of oversight and 
        regulation as domestic exchanges such as the NYMEX when those 
        exchanges allow U.S. access to their platforms, trade U.S. 
        destined commodities, or are owned and operated by U.S.-based 
        companies.

        2. Raising margin requirements (or necessary collateral) for 
        non-commercial entities or so-called ``non-physical players,'' 
        i.e., commodities traders and investors that do not have the 
        ability to take physical possession of the commodity, or 
        otherwise incurs risk (including price risk) associated with 
        the commodity either in connection with their business or that 
        of a client. In other words, anyone who does not meet the 
        definition of ``eligible commercial entity'' under 7 U.S.C.  
        1a(11). Currently, margin requirements in futures trading are 
        as low as 3 percent for some contracts. To buy U.S. equities, 
        margin requirements are a minimum of 50 percent.

        3. Requiring non-commercial traders (e.g., financial 
        institutions, insurance companies, commodity pools) to have the 
        ability to take physical delivery of at least some of the 
        product. (Rep. John Larson (D-CT) is considering such a 
        proposal).

        4. Banning from the market any participant that does not have 
        the ability to take direct physical possession of a commodity, 
        is not trading in order to manage risk associated with the 
        commodity, or is not a risk management or hedging service 
        (again, anyone that does not meet the statutory definition of 
        ``commercial entity'' under 7  U.S.C. 1a(11).

        5. Significantly increase funding for the CFTC. The FY 2009 
        President's budget recommendation is for $130 million. While 
        this is an increase from previous years, CFTC staff has 
        declined by 12 percent since the commission was establish in 
        1976, yet total contract volume has increased over 8,000 
        percent. Congress should appropriate sufficient funding to keep 
        up with the ever changing environment of energy derivatives 
        markets.

    We and our customers need our public officials, including those in 
Congress and on the CFTC, to take a stand against excessive speculation 
that artificially inflates energy prices. PMAA strongly supports the 
free exchange of commodity futures on open, well regulated and 
transparent exchanges that are subject to the rule of laws and 
accountability. Many PMAA members rely on these markets to hedge 
product for the benefit of their business planning and their consumers. 
Reliable futures markets are crucial to the entire petroleum industry. 
Let's make sure that these markets are competitively driven by supply 
and demand.
    Thank you again for allowing me the opportunity to testify before 
you today.

    Senator Cantwell. Thank you, Mr. Ramm.
    Fourth, we'll hear from Lee Ann Watson, Deputy Director of 
Division of Investigation, Office of Enforcement, for the 
Federal Energy Regulatory Commission. And Ms. Watson helped 
develop and implement FERC's anti-manipulation authority, which 
is the same authority that we have given to the Federal Trade 
Commission as it relates to physical oil markets.
    Ms. Watson, welcome.

         STATEMENT OF LEE ANN WATSON, DEPUTY DIRECTOR, 
      DIVISION OF INVESTIGATIONS, OFFICE OF ENFORCEMENT, 
          FEDERAL ENERGY REGULATORY COMMISSION (FERC)

    Ms. Watson. Thank you.
    First, let me apologize for my voice. I woke up with a cold 
this morning, so bear with me.
    Senator Cantwell. Thank you. If you could just pull the 
microphone a little closer----
    Ms. Watson. A little closer?
    Senator Cantwell.--that'll help you and less----
    Ms. Watson. Is this a little----
    Senator Cantwell.--strain on your voice.
    Ms. Watson.--better?
    Senator Cantwell. Yes, thank you.
    Ms. Watson. Thank you.
    Madam Chair and Members of the Committee, I thank you for 
inviting me to testify today. I am here today to discuss the 
experience of the Federal Energy Regulatory Commission, or 
FERC, in implementing the statutory authority granted to FERC 
in the Energy Policy Act of 2005, or as--I will refer to it as 
EPAct--to prohibit manipulation in wholesale electric energy 
and natural gas markets.
    In particular, this experience may be useful, as it may 
relate to similar authority recently granted to the Federal 
Trade Commission, or the FTC. I note, however, that I could not 
address market manipulation in the oil and petroleum products 
markets. FERC does not have jurisdiction over those markets or 
expertise in how such manipulation might be prevented by the 
FTC.
    I also note that I appear before you today as a staff 
witness, and I do not represent the views of the Commission or 
any individual commissioner.
    EPAct added new provisions in both the Federal Power Act 
and the Natural Gas Act to prohibit manipulation in FERC 
jurisdictional markets for wholesale sales of electric energy 
and natural gas and electric transmission and natural gas 
transportation. Because the statutory authority was not self-
implementing, however, upon passage of EPAct, in August 2005, 
the FERC staff immediately began work in preparing a Notice of 
Proposed Rulemaking, or NOPR, which was issued on October 20, 
2005. After reviewing and considering comments on the NOPR, the 
FERC issued, on January 19, 2006, its final anti-manipulation 
regulations. These new regulations, one for natural gas and one 
for electricity, closely model Rule 10b-5 of the Securities 
Exchange Act of 1934, pursuant to Congress's direction that the 
prohibited manipulative activity should be consistent with the 
prohibited activity in Section 10b of the Securities Exchange 
Act. That direction was an important factor in the FERC's 
ability to quickly implement its anti-manipulation regulations 
and authority.
    The new anti-manipulation regulations promulgated by FERC 
are very broad, just like 10b-5, and are meant to be a catchall 
fraud provision, just as Rule 10b-5 has been interpreted in the 
securities context. And while FERC's anti-manipulation 
regulations seek to draw on the large body of security case law 
under Section 10b and Rule 10b-5, FERC also recognized that the 
securities case law could only be applied as appropriate in the 
circumstances of each case because of the differences in the 
missions between the SEC and FERC. For example, the SEC, whose 
mission is to assure adequate disclosure in the financial 
markets and to protect investors, does not have a duty to 
assure that the price of a security is just and reasonable. The 
FERC, on the other hand, has as a core mission to assure the 
just and reasonable prices for wholesale sales of electricity 
and natural gas and for the transmission and transportation of 
those products. Despite these differences, the securities case 
law is available by analogy, and thus provides guidance and 
certainty to the market participants who wish to avoid 
violating the FERC's anti-manipulation regulations within the 
framework of the FPA and the NGA.
    In developing and adopting the anti-manipulation 
regulations under the new EPAct provisions, FERC was not 
writing on an entirely clean slate, since, prior to EPAct, it 
did have regulations in place to prohibit market manipulation. 
In 2003, in the aftermath of the California energy crisis, FERC 
had required all market-based rate sellers to incorporate, in 
their tariffs or authorizations, a rule prohibiting market 
manipulation. However, because the breadth and application of 
the anti-manipulation provisions contained in EPAct were 
substantially greater, the FERC decided to rescind its prior 
provisions.
    In addition to implementing its new anti-manipulation rules 
under EPAct quickly, FERC also promptly issued a policy 
statement on enforcement, highlighting the factors it would 
take into account in determining civil penalties, which were 
also enhanced under EPAct. In this regard, FERC also looked to 
other agencies with more experience, such as the Department of 
Justice, the CFTC, and the SEC, and modeled the policy 
statement on enforcement on prior proven policies of its sister 
agencies.
    The FERC has not hesitated to put its new anti-manipulation 
authority to work to protect consumers. In July 2007, less than 
2 years after EPAct was enacted, the FERC issued two orders to 
show cause for alleged market manipulation, seeking to oppose 
civil penalties in excess of $450 million, and this includes 
the Amaranth case, which has been noted earlier today. Further, 
since the time that EPAct provided FERC with the increased 
civil penalty authority, it has approved 15 settlements which 
include civil penalties of over $52 million.
    This concludes my remarks, and I would be happy to answer 
any questions the Members of the Committee might have.
    [The prepared statement of Ms. Watson follows:]

  Prepared Statement of Lee Ann Watson, Deputy Director, Division of 
   Investigations, Office of Enforcement, Federal Energy Regulatory 
                           Commission (FERC)
    Madam Chair and Members of the Committee:

    Thank you for inviting me to testify today. My testimony addresses 
the Federal Energy Regulatory Commission's (FERC) implementation of the 
aspects of the Energy Policy Act of 2005 (EPAct 2005) provisions 
prohibiting manipulation of wholesale electric energy and natural gas 
markets. I appear before you today as a staff witness and do not 
represent the views of the Commission or any individual Commissioner.
    At the outset, I should note for the Committee's information that I 
am not prepared to discuss whether there is or has been manipulation of 
oil or petroleum markets nor am I able to discuss crude oil or gasoline 
prices. With respect to oil and petroleum, FERC's jurisdiction is very 
limited. FERC has jurisdiction only over ratemaking of oil pipeline 
transportation in interstate commerce under the authority of the 
Interstate Commerce Act and the Department of Energy Organization Act 
of 1977, 42 U.S.C.  7101 et seq. FERC has no jurisdiction over, and 
therefore no authority to investigate, the prices charged for oil, 
gasoline, diesel, or heating oil, or the markets where those and other 
oil and petroleum products are traded.
    FERC's primary mission is to ensure ``just and reasonable'' rates 
for certain wholesale sales of electric energy and natural gas in 
interstate commerce and electric transmission and natural gas 
transportation in interstate commerce. FERC's efforts to prohibit 
manipulation of the wholesale sales of electric energy and natural gas 
markets began in earnest in November 2003, prior to EPAct 2005. At that 
time, the FERC adopted the Market Behavior Rules, including Market 
Behavior Rule 2.\1\ In contrast to the FERC's current broad EPAct 2005 
anti-manipulation regulations, which I will discuss momentarily, Market 
Behavior Rule 2 was limited in scope and application; it applied to 
certain sales and sellers of electricity and natural gas. 
Notwithstanding its limitations, Market Behavior Rule 2 and its 
companion rules were an important first step in an evolving enforcement 
program at FERC that balanced the need for clearly delineated ``rules 
of the road'' for market participants without unduly impairing FERC's 
ability to address new and unforeseen abuses.
---------------------------------------------------------------------------
    \1\ Investigation of Terms and Conditions of Public Utility Market-
Based Rate Authorizations, ``Order Amending Market-Based Rate Tariffs 
and Authorizations,'' 105 FERC  61,218 (2003), reh'g denied, 107 FERC 
 61,175 (2004); Amendments to Blanket Sales Certificates, 105 FERC  
61,218 (2003), reh'g denied, 107 FERC  61,174 (2004).
---------------------------------------------------------------------------
    On August 8, 2005, EPAct 2005 became law and significantly 
supplemented the Commission's enforcement authorities. Three 
enforcement tools in particular provided FERC with the ability to more 
adequately police jurisdictional electric and natural gas markets and 
sanction manipulative behavior in those markets. First, EPAct 2005 
amended the FPA and NGA to grant broad statutory authority to prohibit 
fraud and market manipulation. Second, it granted robust civil penalty 
authority to deter and punish violations of FERC orders, rules and 
regulations. Third, it provides authority to seek a court order to bar 
individuals found to have violated FERC's new anti-manipulation 
authority from acting as an officer or director of a jurisdictional 
entity, or engaging in FERC-jurisdictional transactions. I discuss 
these new authorities in further detail below.
    In sections 315 and 1283 of EPAct 2005, Congress added section 4A 
to the Natural Gas Act (NGA) and section 222 to the Federal Power Act 
(FPA), respectively.\2\ These sections prohibit ``any entity,'' not 
only those traditional energy companies regulated by FERC, from the use 
or employment of ``any manipulative or deceptive device or 
contrivance,'' as those terms are used in section 10(b) of the 
Securities Exchange Act of 1934 (Exchange Act), in connection with the 
purchase or sale of natural gas, electric energy, or transportation or 
transmission services subject to FERC's jurisdiction.\3\ Although 
sections 315 and 1283 of EPAct were not self-implementing, by modeling 
them on section 10(b) of the Exchange Act, and explicitly directing 
that certain terms be used as in section 10(b), Congress provided FERC 
a clear model to follow--SEC Rule 10b-5--in prohibiting market 
manipulation.\4\
---------------------------------------------------------------------------
    \2\ Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594 
(2005) et seq.; 15 U.S.C.  717 et al. (2000); 16 U.S.C.  791 et al. 
(2000).
    \3\ Securities Exchange Act of 1934, 15 U.S.C.  78j(b) (2000).
    \4\ 17 C.F.R.  240.10b-5 (2007).
---------------------------------------------------------------------------
    On October 20, 2005, only 2 months after the passage of EPAct 2005, 
FERC took the first public step toward implementing the anti-
manipulation fraud authority when it issued a Notice of Proposed 
Rulemaking (NOPR).\5\ FERC was able to act quickly in part because FERC 
staff had been studying SEC Rule 10b-5 in anticipation of the passage 
of EPAct 2005. Upon the passage of EPAct 2005, FERC staff met with 
senior enforcement staff from the SEC and held several subsequent 
conference calls with them to aid in FERC's understanding of the model 
upon which it would propose its anti-manipulation rule. Thirty parties 
filed comments and nine parties filed reply comments to the NOPR, 
representing a diverse group of industry stakeholders. Overwhelmingly, 
commenters were supportive of our efforts to implement well-developed, 
clear and fair rules modeled on SEC Rule 10b-5 because the approach 
provided FERC, and industry, the opportunity, where appropriate, to 
make use of the significant body of case law that has developed under 
Exchange Act section 10(b) and SEC Rule 10b-5. In the NOPR, FERC noted 
the overlap between its previously adopted Market Behavior Rule 2 and 
the proposed EPAct 2005 anti-manipulation regulations. FERC said that 
it would retain Market Behavior Rule 2 pending the promulgation of a 
final EPAct 2005 regulation so as to ensure there would be no gap in 
FERC's prohibition of market manipulation. FERC also said, however, 
that it would seek comment on whether it should revise or rescind 
Market Behavior Rule 2.
---------------------------------------------------------------------------
    \5\ Prohibition of Energy Market Manipulation, 113 FERC  61,067 
(2005) (NOPR).
---------------------------------------------------------------------------
    In November 2005, FERC proposed to rescind Market Behavior Rule 2 
and the analogous gas regulation once it issued new anti-manipulation 
provisions of EPAct 2005.\6\ FERC noted that rescission of Market 
Behavior Rule 2 would simplify FERC's rules by avoiding duplicative 
regulation, and in so doing, reduce regulatory uncertainty by assuring 
that all market participants are held to the same standard. FERC 
explained that rescinding the Market Behavior Rules was consistent with 
Congressional intent in EPAct 2005, which provided FERC explicit anti-
manipulation authority and a clear model to follow in implementing that 
authority. FERC was concerned that having two general anti-manipulation 
rules, differing in scope and application, would result in significant 
regulatory uncertainty without offering any additional protection for 
customers. After careful review of the 21 comments and four reply 
comments in response to the November 2005 order, which were mostly 
supportive of FERC's objective to bring greater clarity to its rules 
and regulations, FERC exercised its discretion and rescinded Market 
Behavior Rule 2 in February 2006, approximately a month after the 
effective date of the new EPAct 2005 anti-manipulation regulations.\7\
---------------------------------------------------------------------------
    \6\ Investigation of Terms and Conditions of Public Utility Market-
Based Rate Authorizations, 113 FERC  61,190 (2005).
    \7\ Order Revising Market-Based Rate Tariffs and Authorizations, 
114 FERC  61,165 (2006).
---------------------------------------------------------------------------
    As mentioned earlier, in EPAct 2005, Congress added section 4A to 
the NGA and section 222 to the FPA. These sections prohibit ``any 
entity'' from the use or employment of ``any manipulative or deceptive 
device or contrivance,'' as those terms are used in section 10(b) of 
the Exchange Act, in connection with the purchase or sale of natural 
gas, electric energy, or transportation or transmission services 
subject to FERC's jurisdiction.
    On January 19, 2006, just 5 months after the passage of EPAct 2005, 
FERC implemented section 4A to the NGA and section 222 to the FPA and 
promulgated its final EPAct 2005 anti-manipulation regulations, which 
are codified in Part 1c of Title 18 of the Code of Federal 
Regulations.\8\ Consistent with Congressional intent, the scope of 
application of Part 1c is not limited to FERC jurisdictional entities. 
Instead, Part 1c is a ``catch-all'' provision, applying to any entity 
that perpetrates a fraud, with the requisite scienter, in connection 
with the purchase or sale of natural gas or electric energy or 
transportation or transmission services subject to FERC's jurisdiction. 
The issues raised by commenters to the NOPR did not require substantive 
changes to the proposed rule because the preamble to the final rule, 
Order No. 670, deals with the issues raised and provides clarity and 
guidance as to how the rule will operate.\9\ For example, in Order No. 
670, FERC recognizes the differences in mission between the FERC and 
the SEC--that is, the SEC does not have a duty to assure that the price 
of a security is just and reasonable just as FERC's duty is not to 
protect purchasers though a regime of disclosure. Despite these 
differences in mission, however, FERC recognized that natural gas and 
power markets, like securities markets, are susceptible to fraud and 
market manipulation.
---------------------------------------------------------------------------
    \8\ 18 C.F.R.  1c (2007).
    \9\ Prohibition of Energy Market Manipulation, III FERC Stats. & 
Regs., Regulation Preambles P31,202 (2006) (Order No. 670).
---------------------------------------------------------------------------
    Part 1c gives FERC an important tool to ensure that the markets 
subject to its jurisdiction are well-functioning, and represents an 
important step toward assuring that customers are properly safeguarded 
from acts of market manipulation while providing regulatory certainty 
to market participants. Part 1c became effective upon its publication 
in the Federal Register on January 26, 2006. Two enforcement actions, 
one under Part 1c and one under its predecessor Market Behavior Rule 2, 
where FERC made preliminary findings of market manipulation involving 
traders' unlawful actions in natural gas markets and proposed civil 
penalties totaling $458 million, demonstrate that FERC is dedicated to 
ensuring the markets subject to its jurisdiction are well-functioning 
and free from fraud.\10\ FERC's investigative activities are not 
limited to these two matters, but FERC's regulations prohibit staff 
from discussing any other potential investigative matters.
---------------------------------------------------------------------------
    \10\ See Energy Transfer Partners, L.P., 120 FERC P 61,086 (2007) 
(Market Behavior Rule 2); Amaranth Advisors L.L.C., 120 FERC P 61,085 
(2007) (Anti-Manipulation Rule).
---------------------------------------------------------------------------
    In EPAct 2005, Congress also granted FERC enhanced authority to 
assess civil penalties for violations of the Federal Power Act, Natural 
Gas Act and the Natural Gas Policy Act in three important ways. First, 
Congress expanded FERC's FPA civil penalty authority to cover 
violations of any provision of Part II of the FPA, as well as of any 
rule or order issued there under.\11\ Second, Congress extended FERC's 
civil penalty authority to cover violations of the NGA or any rule, 
regulation, restriction, condition, or order made or imposed by FERC 
under NGA authority.\12\ Third, Congress established the maximum civil 
penalty FERC may assess under the NGA, NGPA, or Part II of the FPA as 
$1,000,000 per violation for each day that it continues.\13\ Since 
January 1, 2006, FERC has employed its new civil penalty authority, 
which was not made retroactive by EPAct 2005, in 15 cases resulting in 
a total of over $52 million in civil penalties and tailored compliance 
plans.
---------------------------------------------------------------------------
    \11\ 16 U.S.C.  825o-1 (2000) (as amended by EPAct 2005,  
1284(e)); 16 U.S.C.  823b (2000).
    \12\ 15 U.S.C.  717t-1 (2000) (added by EPAct 2005,  314(a)(1)).
    \13\ Supra notes 11 and 12; 15 U.S.C.  3414(b)(6) (2000) (as 
amended by EPAct 2005,  314).
---------------------------------------------------------------------------
    The third tool EPAct 2005 provided FERC is the ability to seek an 
order of a Federal district court to prohibit, conditionally or 
unconditionally, and permanently or for such period of time as the 
court determines, any individual who is engaged or has engaged in 
practices constituting a violation of FERC's EPAct 2005 anti-
manipulation regulations from: (1) acting as an officer or director of 
a natural gas company; or (2) engaging in the business of the 
purchasing or selling of natural gas or electric energy, or the 
purchasing or selling of transmission services subject to FERC's 
jurisdiction. This is a particularly useful tool where, for example, 
FERC determines that it is necessary to seek the removal of a rogue 
trader that was found to have violated Part 1c as an individual. A 
similar provision is contained in the FPA.
    Prior to the promulgation of FERC's new anti-manipulation rule, but 
on the same day in October 2005 when FERC issued its proposed anti-
manipulation rule NOPR, FERC issued its Policy Statement on Enforcement 
to provide the public with guidance and regulatory certainty regarding 
FERC's enforcement of the statutes, orders, rules and regulations it 
administers.\14\ Among other things, the Policy Statement on 
Enforcement details the FERC's penalty assessment process. Shortly 
after the issuance of the Policy Statement on Enforcement, FERC's 
instituted a No-Action Letter Process whereby regulated entities can 
seek informal staff advice regarding whether a transaction would be 
viewed by staff as constituting a violation of certain orders or 
regulations.\15\ In both Orders, FERC drew on the best practices of 
other economic regulators including the Department of Justice, SEC and 
CFTC. As of May 15, 2008, following a public conference where 
stakeholders were invited to comment on aspects of FERC's enforcement 
program, FERC issued a Revised Policy Statement on Enforcement which 
builds on the October 2005 statement.\16\ Additionally, in December 
2006, FERC issued a policy statement regarding the process for 
assessing civil penalties, which provides a comprehensive review of the 
statutory requirements associated with the imposition of civil 
penalties under Parts I and II of the FPA, the NGA, and the NGPA.\17\
---------------------------------------------------------------------------
    \14\ Enforcement of Statutes, Orders, Rules, and Regulations, 113 
FERC  61,068 (2005).
    \15\ Informal Staff Advice on Regulatory Requirements, 113 FERC  
61,174 (2005).
    \16\ Enforcement of Statutes, Orders, Rules, and Regulations, 123 
FERC  61,156 (2008) (Revised Policy Statement on Enforcement) 
(superseding Enforcement of Statutes, Orders, Rules, and Regulations, 
113 FERC  61,068 (2005)).
    \17\ Process for Assessing Civil Penalties, 117 FERC  61,317 
(2006).
---------------------------------------------------------------------------
    In conclusion, I want again to thank the Committee for this 
opportunity to testify today on an important aspect of the FERC's 
enforcement program. I would be happy to answer any questions members 
of the Committee may have.
                        *          *          *
    In sum, below are the milestones in the implementation timeline for 
the EPAct 2005 anti-manipulation regulations:

        1. Pre-Passage of EPAct 2005: FERC staff conducts due diligence 
        on SEC and CFTC anti-manipulation rules and precedent.

        2. August 8, 2005: EPAct 2005 becomes law and FERC staff forms 
        an anti-manipulation rule drafting team.

        3. September 14, 2005: FERC staff meets with SEC staff to 
        discuss SEC's experience with Rule 10b-5.

        4. October 20, 2005: FERC issues its NOPR to prohibit energy 
        market manipulation and FERC issues its first Policy Statement 
        on Enforcement to provide guidance and regulatory certainty 
        regarding FERC's enforcement program.

        5. November 18-December 30, 2005: FERC receives and reviews 
        thirty comments and nine reply comments on the NOPR.

        6. January 19, 2006: FERC promulgates its anti-manipulation 
        rules by amending its regulations to implement the anti-
        manipulation authority granted in EPAct 2005.

        7. January 26, 2006: FERC's anti-manipulation regulations 
        became effective.

    Senator Cantwell. Thank you very much. And, again, we 
appreciate you being here, Ms. Watson.
    We're now going to hear from Mark Cooper, Director of 
Research at Consumer Federation of America.
    We appreciate you being here to testify today, Mr. Cooper.

STATEMENT OF DR. MARK N. COOPER, DIRECTOR OF RESEARCH, CONSUMER 
                     FEDERATION OF AMERICA

    Dr. Cooper. Thank you, Madam Chairwoman, Members of the 
Committee.
    The speculative bubble in petroleum markets has cost the 
average American household about $1,500 in increased gasoline, 
natural gas, and electricity expenditures in the 2 years since 
the Senate Permanent Committee on Investigations first called 
attention to the problem. The Senate knew about this problem 2 
years ago. It has cost the economy well over half a trillion 
dollars in those 2 years.
    Worse still, it is now clear that the commodities futures 
markets have ceased to play their proper role of helping to 
smooth the functioning of physical markets for vital 
commodities like energy and food. Instead, they have become 
engines of speculation that feed volatility, amp up volume, and 
increase risk, driving prices up and driving commercial traders 
out of these markets. Unfortunately, the CFTC and the FERC have 
failed to protect the public, because they were slow to 
recognize the problem are not looking for the real causes, for 
they look for a narrow set of abuses, adopting existing case 
law, they ignore the much broader flaws in the commodities 
futures markets. Energy commodities, in particular, are 
vulnerable to abuse, but they are traded in markets that are 
either totally unregulated or inadequately regulated. Prices 
are well above the costs of production. Risk premiums are high 
and rising. The market structure and behaviors are biased in 
favor of higher prices and against consumers. There is a 
pervasive pattern of past abuses, including manipulation of 
large positions, lack of transparency, structural advances 
enjoyed by large traders, the exercise of market power, insider 
trading, self-dealing, and trading practices that accelerate 
market trends.
    Energy commodity markets are a recent phenomenon, and they 
have been plagued by inefficiency, manipulation, and rampant 
speculation throughout much of their history, creating 
additional risk, which requires costly management, enriches the 
speculators and arbitrageurs, but does physical traders and 
consumers no good whatsoever. These markets need to be 
overhauled from top to bottom.
    It would be reassuringly simple if we could just blame the 
current speculative bubble on the blind ignorance, 
indifference, and ineptitude of the regulatory agencies, ``just 
fire the commissioners and clean the problem up.'' The recent 
proposals that have been put on the table are baby steps that 
will not solve the problem. There are more fundamental problems 
that must be addressed.
    We have made it so easy to play in financial markets that 
investments in long-term productive assets are unattractive. We 
must turn down the volume by imposing more stringent conditions 
on these financial markets. We must not only close the Enron 
loophole which allowed the vast swath of unregulated trading to 
take place, but we also must ensure vigorous enforcement of 
registration and reporting.
    We must take back the authority we have given to foreign 
exchanges and stop abandoning authority to private actors. 
Large traders should be required to register and report their 
entire positions across all commodity markets. Without 
comprehensive reporting, there will always be room for mischief 
that is out of the sight of the regulator. Registration 
reporting should trigger scrutiny to ensure the good character, 
integrity, and competence of traders. Failure to comply with 
these regulations should result in mandatory jail terms. Fines 
are not enough to dissuade abuse in these commodity markets, 
because there is, just, so much money to be made that people 
will keep trying and trying. You have to throw the bad guys in 
jail. That's the only way you'll get the attention of all the 
people who know they can make a fortune by manipulating these 
markets.
    More broadly, we need to restore the balance between 
speculation and productive investment. Margin requirements and 
reserve requirements in organized exchanges are a fraction of 
the margin requirements on stocks. If it is cheaper to put your 
money into speculation, why bother with real, productive 
investment? The margin requirements for commodity trading among 
noncommercial traders should be 50 percent higher than the 
margin requirements for investment in stocks. They should be 
more lenient for physical traders and commercial traders who 
really need to get these commodities into the tanks and to 
consumers.
    We must level the playing field between long-term 
productive investment and short-term speculative gains, with a 
tax on short-term capital gains between 33 and 50 percent. This 
will make holding productive assets for long periods as 
attractive as flipping short-term financial paper.
    If we do not do more than the approaches that are on the 
table, we will continue to lurch from crisis to crisis. The 
halfhearted reaction of the CFTC and the FERC are the 
regulatory equivalent of FEMA's reaction to Hurricane Katrina, 
too low and too slow because the agency does not adequate the 
magnitude of the disaster. American consumers are suffering 
needlessly from the speculative bubble in vital necessities. It 
is time for thorough reform and reregulation of financial 
commodities markets so that they can serve the American people, 
not oppress them.
    Thank you.
    [The prepared statement of Dr. Cooper follows:]

     Prepared Statement of Dr. Mark Cooper, Director of Research, 
                     Consumer Federation of America
    Mr. Chairman and Members of the Committee,

    My name is Dr. Mark Cooper. I am Director of Research at the 
Consumer Federation of America. I greatly appreciate the opportunity to 
testify today on the immense burden that the speculative bubble in 
commodities is placing on American households. Congressional studies, 
like that prepared by the Senate Permanent Subcommittee on 
Investigations, committee on Homeland Security \1\ and Governmental 
Affairs \2\ and industry analyses have become convinced that 
speculation is contributing to skyrocketing energy prices--by adding as 
much as $30 per barrel or more. Natural gas prices have been afflicted 
by a speculative premium of a similar order of magnitude.\3\ Since the 
Senate Permanent Subcommittee on Investigations first flagged this 
problem 2 years ago, the speculative bubble in the energy complex has 
cost the economy more than $500 billion--i.e., half a trillion dollars. 
Expenditures for household energy have more than doubled in the past 6 
years and speculation has played a significant part in that run up.\4\ 
In the past 2 years, the speculative bubble has cost consumers over 
$1,500.
---------------------------------------------------------------------------
    \1\ Senate Permanent Subcommittee on Investigations, Committee on 
Homeland Security, The Role of Market Speculation in Rising Oil and Gas 
Prices: A Need to Put the Cop Back on the Beat (June 27, 2006).
    \2\ Akira Yanagisawa, Decomposition Analysis of the Soaring Crude 
Oil Prices: Analyzing the Effects of Fundamentals and Premium 
(Institute of Energy Economics, March 2008; Robert J. Shapiro and Nam 
D. Pham, An Analysis of Spot and Futures Prices for Natural Gas: The 
Roles of Economic Fundamental, Market Structure, Speculation and 
Manipulation (August, 2006).
    \3\ Mark Cooper, The Role of Supply, Demand and Financial Commodity 
Markets in the Natural Gas Price Spiral, A report Prepared for the 
Midwest Attorney General Natural Gas Working Group (Illinois, Iowa, 
Missouri, and Wisconsin (March, 2006).
    \4\ Statement of Dr. Mark Cooper, ``Consumer Effects of Retail Gas 
Prices,'' Judiciary Committee Antitrust Task Force, U.S. House of 
Representatives, May 7, 2008
---------------------------------------------------------------------------
    The national economy and households budgets are being clobbered by 
these rising energy prices and it is not just supply and demand that 
are to blame. Our analysis shows that there is a powerful interaction 
between physical market problems and financial market problems that 
creates a vicious, anti-consumer price spiral (see Exhibit 1). In 
today's hearing I focus on the financial market aspect.
Exhibit 1: Physical, Financial and Regulatory Factors in the Energy 
        Price Spiral
        
        
    Source: Mark Cooper, ``The Failure of Federal Authorities to 
Protect American Energy Consumers from Market Power and Other Abusive 
Practices,'' Loyola Consumer Law Review, 19:4 (2007), p. 318.
The Problem of Hyper-Speculation in Energy Commodity Markets
    In March of 2006 I published a report for the Attorneys General of 
Illinois, Iowa, Missouri and Wisconsin that concluded that all was not 
right in natural gas financial markets.

        Thus, while there is a spiral of upward pressure on prices 
        radiating from the physical market and filtered through 
        regulation, this analysis shows that the financial commodity 
        markets may be dramatically accentuating the problem of high 
        and volatile prices.

        Defenders of the financial markets want to blame the whole 
        problem on the physical markets and even claim that traders 
        will help solve the problem. But the evidence suggests that the 
        financial commodity market bears at least some of the blame for 
        pushing prices up. Today, the evidence that the financial 
        commodity markets are significantly accelerating price 
        increases in natural gas markets is circumstantial, but quite 
        strong.

        The overall pattern of prices supports the proposition that 
        they have run up beyond anything that is justified by the 
        problems in the physical market.

   We have a commodity that is vulnerable to abuse, in a new 
        market that has been under-regulated from its birth.

   Public policy adopted in 2000 further reduced regulation and 
        opened the door to counterproductive, if not outright 
        manipulative, behaviors and pushed prices higher.

   We have a clear theory about how consumers could be hurt in 
        this market.

   The problem is that both the structure of the market and the 
        behaviors of market players are biased in favor of higher 
        prices and against consumers.

   We have evidence at the micro levels of a pervasive pattern 
        of past abuses and rumors about suspicious behavior in the 
        current market.\5\
---------------------------------------------------------------------------
    \5\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, p. 88.

        There are several ways in which financial markets may be 
        magnifying the upwardly volatile spiral of prices and 
---------------------------------------------------------------------------
        contribute to the ratchet:

        Financial markets thrive on volatility and volume, but 
        volatility and volume have costs. Producers of gas demand to be 
        paid a higher premium to bring their gas to market sooner 
        rather than later. Traders demand to be rewarded for the risks 
        they incur, risks that are increased by the trading process 
        itself.

        The influx of traders fuels volatility and raises concerns 
        about abusive or manipulative trading practices.

        Econometric analyses of the natural gas markets in recent years 
        raise important questions as to how well the natural gas 
        markets work. Given the uncertainty about the functioning of 
        these markets, the claim that the market price is always right 
        because it's the market price should be questioned:

        The economic analysis does not support the claim that these 
        markets operate efficiently to establish prices.

        Risk premiums, which raise the price substantially (10 to 20 
        percent), are high and rising.

        Prices are well above the underlying costs of production.

        The operation of financial markets is no accident. Trading 
        reflects the rules that are established--by law and through 
        self-organization. The most troubling part about natural gas 
        trading is that policymakers really have no clue about what 
        goes on:

        The majority of transactions take place in markets that are 
        largely unregulated.

        These over-the-counter markets, reported in unaudited, 
        unregulated indices, are a major factor in setting the price of 
        natural gas. And these unaudited, unregulated markets have 
        behaved very poorly in recent years, with numerous instances of 
        misreporting of prices.

        Even where there is light-handed regulation, the rules are 
        inadequate to protect the public:

        Players in the natural gas markets can hold very large 
        positions without having to disclose the size of their 
        positions to any regulatory authority, and a small number of 
        large players can influence the price that consumers pay in a 
        very short period of time and under circumstances that place 
        the consumer at risk.

        Index prices are often based on a small number of self-reported 
        transactions and there are no mechanisms for determining if 
        such transactions represent an accurate sampling of the natural 
        gas market. When even the hint of accountability was imposed by 
        merely being asked to certify the veracity of reported 
        transactions, traders stopped reporting.\6\
---------------------------------------------------------------------------
    \6\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, p. 9.

        There has been a failure of public policy at every level to 
        build a system that protects the public. The structure of the 
        physical markets induces conduct that has created and is 
        sustaining a tight market. The structure of the financial 
        commodities markets induces conduct that magnifies upward 
---------------------------------------------------------------------------
        pressures on prices . . .

        The financial markets are not only largely unregulated, they 
        are structured in such a way that there are a large number of 
        small buyers who have weakened incentives and limited ability 
        to resist price increases facing a small number of large 
        sellers who have a strong incentive and a much greater ability 
        to hold out for higher prices. Holding out on the supply side 
        may simply mean buying and holding assets in the ground or 
        positions in the futures market and waiting for buyers who need 
        the commodity to blink.

        Most troubling is the fact that many of the impacts of many of 
        the legislative and regulatory policies that have worked to the 
        detriment of consumers were predictable and preventable, given 
        the nature of the commodity and the type of market that 
        Congress and the regulatory agencies in Washington created.\7\
---------------------------------------------------------------------------
    \7\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, p. 89.

    When the Federal Energy Regulatory Commission got wind of the 
report, without ever talking to us about it, they ridiculed it at an 
open meeting of the Commission. The Chairman of the FERC, reflecting 
the party line of the Administration, insisted that all the price 
gyrations were the result of market fundamentals. He was absolutely 
certain that the FERC had its finger on the pulse of the commodity 
markets. He was absolutely wrong.\8\ At the very moment he was 
rejecting our analysis, unbeknownst to him, the Amaranth corner was 
taking place. Neither the FERC nor the CFTC had a clue about what was 
going on.
---------------------------------------------------------------------------
    \8\ A point-by-point response to the FERC's misguided comments on 
the report was provided to but never acknowledged by the Commission 
(Letter Appendix to Cooper, The Role of Supply, Demand and Financial).
---------------------------------------------------------------------------
    Missing a massive manipulation is embarrassing, but the real damage 
came when the blind ignorance of the FERC led it to waste the chance to 
use its newly minted powers under the Energy Policy Act of 2005 to 
follow our recommendations to adopt a broad view of abusive behaviors 
that afflict energy commodity markets.\9\ As I wrote in the natural gas 
report:
---------------------------------------------------------------------------
    \9\ Federal Energy Regulatory Commission, Order No. 670, 
Prohibition of Energy Market Manipulation, Docket No. RM06-3-000, 
January 19, 2006; Memorandum of Understanding Between The Federal 
Energy Regulatory Commission and the Commodity Futures Trading in 
Commission Regarding Information Sharing and Treatment of Proprietary 
Trading and Other Information, October 12, 2005.

        The FERC has also issued rules implementing the Energy Policy 
        Act of 2005 that change its market monitoring procedures and 
        implement new powers granted in the Act. It has entered into a 
        vague memorandum of understanding about sharing information. 
        The foregoing analysis demonstrates that a lot more than 
        manipulation is at issue in the natural gas price spiral and 
        suggests that much more needs to be done. Both the FERC and the 
        CFTC are looking for a very narrow range of manipulative 
        behaviors with a very narrow telescope. Unlike other physical 
        commodities, a vast amount of trading of natural gas goes on in 
        the over-the-counter markets that are hidden from the view and 
        beyond the authority of these agencies. The indices that are 
        based on this unregulated market activity have been unreliable 
---------------------------------------------------------------------------
        and remain subject to doubt.

        In the case of regulated activities the changes at the FERC 
        replicate the weaknesses of the CFTC approach by adopting its 
        definitions and case law. It may be illegal to contrive to 
        manipulate markets and there are new fines if you are caught 
        doing so, but the FERC is going to have great difficulty 
        proving manipulation, when prices are ``moved.'' It is 
        precisely for this reason that the CFTC and the exchanges 
        subject to its jurisdiction do more than rely on narrowly 
        defined manipulation statutes to prevent abuse.\10\
---------------------------------------------------------------------------
    \10\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, p. 93.

    The FERC and the CFTC have failed to adopt a broad view of abuses 
in financial markets. They cannot see the abuse because they are not 
looking for it. My earlier analysis of natural gas markets identified 
the numerous ways that prices can be moved by actions that are well 
---------------------------------------------------------------------------
below the radar of the FERC and the CFTC.

        There are strands in this literature that identify potential 
        and actual abusive practices. . .

        manipulation facilitated by large positions,

        lack of transparency,

        structural advantages enjoyed by large traders or the exercise 
        of market power,

        insider trading and self-dealing,

        trading practices that accelerate market trends, perhaps 
        causing them to overshoot.\11\
---------------------------------------------------------------------------
    \11\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, p. 68.

    Instead of taking a hard look at the broad pattern of abuse, the 
FERC adopted a very narrow view of manipulation, taking on the existing 
CFTC case law and definitions. Instead of providing new and vigorous 
oversight over the natural gas market, we have a second cop walking the 
same beat with it eyes half shut.
    Unfortunately, the Federal Trade Commission has started down the 
same useless path. The lengthy discussion of intension (scienter) in 
the advanced notice of proposed rulemaking points the FTC down the same 
dead end path that the FERC took. The FTC needs to break out of the 
narrow ``scienter'' manipulation view to identify and attack the broad 
range of practices and structural conditions that can and have been 
moving prices in the markets.\12\
---------------------------------------------------------------------------
    \12\ Federal Trade Commission, Prohibition on Market Manipulation 
and False Information in Subtitle B of the Energy Independence and 
Security Act of 2007, 16 CFR 317.
---------------------------------------------------------------------------
    The problems that have afflicted natural gas have afflicted other 
energy commodities.

        Natural gas markets share this pattern of abuse with other 
        energy markets. Unilateral actions by any of a number of 
        individuals in any of a number of circumstances provide a 
        landscape in which upward price movements are probable. ``There 
        are regular squeezes in the Brent [oil] market . . . The whole 
        trick is to collect more money in CFDs [contract for 
        differences] than you lose on the physical squeeze . . . People 
        seem to do it in turn. It depends on who's smart enough to move 
        in a way nobody notices until it happens.''

        In a case brought by a private party in late 2001, the 
        practical reality was revealed.

        Tosco won a settlement claiming that Arcadia Petroleum (a 
        British subsidiary of the Japanese firm Mitsui) engineered an 
        elaborate scheme to manipulate oil prices in September 2001 
        through the use of OTC derivatives and a large cash market 
        position to corner the market in Brent crude oil. As a result, 
        the price of Brent crude soared between August 21 and September 
        5, and pushed its price to a premium over West Texas 
        Intermediate crude oil (WTI) . . .

        Dated Brent, which acts as a price marker for many 
        international grades, is physical crude traded on an informal 
        market, rather than a regulated futures exchange. This lack of 
        regulation poses problems for oil producers and consumers 
        seeking a fair price . . . A typical Brent squeeze involves a 
        company quietly building a strong position in short-term swaps 
        called contracts for difference, or CFD's, for a differential 
        not reflected in current prices. The company then buys enough 
        cargoes in the dated Brent market to drive the physical price 
        higher, which boosts the CFD differential . . .

        The Company may lose money on the physical side, but it's more 
        than compensated for by profits on its offsetting paper 
        position in the short-term swaps market.''\13\
---------------------------------------------------------------------------
    \13\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, p. 64.

    The problem in oil markets has continued to mount, as I explained 
---------------------------------------------------------------------------
in a law review article last year.

        On April 29, 2006, the New York Times ran a front-page article 
        under the headline ``Trading Frenzy Adds to Jump in Price of 
        Oil.'' \14\ The Times article opens with a brief paragraph on 
        the conditions in the physical market but then devotes about 36 
        column inches to the proposition that financial markets are 
        adding to the price increase.
---------------------------------------------------------------------------
    \14\ Jad Mouawad & Heather Timmons, Trading Frenzy Adds to Jump in 
Price of Oil, N.Y. Times, Apr. 29, 2006, at A-1.

        ``A global economic boom, sharply higher demand, 
        extraordinarily tight supplies and domestic instability in many 
        of the world's top oil-producing countries--in that environment 
---------------------------------------------------------------------------
        higher oil prices were inevitable.

        But crude oil is not merely a physical commodity . . . It has 
        also become a valuable financial asset, bought and sold in 
        electronic exchanges by traders around the world. And they, 
        too, have helped push prices higher . . .

        ``Gold prices do not go up because jewelers need more gold, 
        they go up because gold is an investment,'' said Roger Diwan, a 
        partner with PFC Energy, a Washington-based consultant. ``The 
        same has happened to oil . . .''

        ``It is the case,'' complained BP's chief executive, Lord 
        Browne, ``that the price of oil has gone up while nothing has 
        changed physically.'' \15\
---------------------------------------------------------------------------
    \15\ Id.

        Three key factors serve to drive the price spiral higher: 
---------------------------------------------------------------------------
        volume, volatility and risk . . .

        The structure and availability of markets plays a role in 
        allowing the volumes to increase.

        Changes in the way oil is traded have contributed their part as 
        well. On Nymex, oil contracts held mostly by hedge funds--
        essentially private investment vehicles for the wealthy and 
        institutions, run by traders who share risk and reward with 
        their partners--rose above one billion barrels this month, 
        twice the amount held 5 years ago.

        Beyond that, trading has also increased outside official 
        exchanges, including swaps or over-the-counter trades conducted 
        directly between, say, a bank and an airline . . .

        Such trading is a 24-hour business. And more sophisticated 
        electronic technology allows more money to pour into oil, 
        quicker than ever before, from anywhere in the world.

        The influx of new money is sustained by movements of different 
        institutions and individuals into the market. ``Everybody is 
        jumping into commodities and there is a log of cash chasing 
        oil,'' said Philip K. Verleger Jr., a consultant and former 
        senior advisor on energy policy at the Treasury Department.''

        This fundamental observation had been offered a couple of years 
        earlier in a front page Wall Street Journal article entitled, 
        ``Oil Brings Surge in Speculators Betting on Prices: Large 
        Investors Playing Ongoing Rise is Increasing Demand and Price 
        Itself:''

        Oil has become a speculator's paradise. Surging energy prices 
        have attracted a horde of investors--and their feverish betting 
        on rising prices has itself contributed to the climb.

        These investors have driven up volume on commodities' exchanges 
        and prompted a large push among Wall Street banks and brokerage 
        firms. . .to beef up energy-trading capabilities. As the action 
        has picked up in the past year, those profiting include large, 
        well-known hedge funds, an emerging group of high-rollers, as 
        well as descendants of once-highflying energy-trading shops 
        such as Enron Corp.\16\
---------------------------------------------------------------------------
    \16\ Id.

    A recent paper from the Japanese Ministry of Economy Trade and 
Industry (METI) has echoed the conclusion of the Senate Permanent 
---------------------------------------------------------------------------
Subcommittee on Investigations.

        According to the METI paper, during the second half of 2007, 
        when the physical price of Wet Texas Intermediate crude 
        averaged $US90 a barrel, market speculation, geopolitical risk 
        and currency factors were responsible for $US30-$US40 of the 
        price.

        The average WTI ``fundamental price,'' consistent with the 
        underlying supply/demand situation, was around $US60/barrel 
        during the December half-year, according to the paper, citing 
        research for the Institute of Energy Economics in Japan.

        Last week the benchmark WTI futures contract touched $US135/
        bbl, more than double the level of a year previously.

        ``We cannot say exactly what the fundamental price is at the 
        moment,'' a METI official said yesterday. ``But we believe the 
        increases this year in the market price have much to do with 
        the influx of speculative money.\17\
---------------------------------------------------------------------------
    \17\ Peter Alford, ``Japan Blames Speculators for Oil Hike,'' May 
28, 2008.

    The study from the Institute on Energy Economics mentioned above 
draws a direct link between the growth in speculation and the rising 
---------------------------------------------------------------------------
price.

        In the futures market, oil-futures trading at New York 
        Mercantile Exchange (NYMEX) are expanding faster than actual 
        spots. While the futures markets are designed to hedge price 
        fluctuations risks, oil is becoming a commodity, making the 
        futures market something like an alternative investment target. 
        As a result, long position by speculators (``non-commercial'' 
        and ``non-reportable'') conspicuously leads to a rise in the 
        oil prices in more cases.\18\
---------------------------------------------------------------------------
    \18\ Akira Yanagisawa, Decomposition Analysis of the Soaring Crude 
Oil Prices: Analyzing the Effects of Fundamentals and Premium 
(Institute of Energy Economics, March 2008), p. 5.

    The plague of the ``influx of speculative money'' has now spread to 
food commodities. For instance, the evidence is mounting that 
speculation is contributing to the run up in food commodity prices that 
we have experienced over the past year. Speculation can be seen as 
contributing to price increases and volatility, as a study from the 
---------------------------------------------------------------------------
University of Wisconsin recently noted.

        One unique aspect of the market the last year has been the size 
        of the non-commercial position in the futures market for corn. 
        Speculative traders have significantly increased their net long 
        position over the last year, while non-commercial traders have 
        tended to be net short. Note that corn prices have been highly 
        correlated with the net positions of non-commercial traders 
        since the first quarter of 2006/2007, and the speculators have 
        had large net long positions most of the year. It is important 
        to note that this does not imply causality, only correlation. 
        However, there does appear to be reason to study more carefully 
        the impact of speculative activity on both price levels and 
        volatility.\19\
---------------------------------------------------------------------------
    \19\ T. Randall Fortenbery and Hwanil Park, The Effect of Ethanol 
Production on the U.S. National Corn Price, University of Wisconsin-
Madison, Department of Agricultural Economics, Staff Paper 523, April 
2008, p. 16.
---------------------------------------------------------------------------
Policy must Recognize the Unique Nature of Vital Commodities and the 
        Dysfunctional Nature of Current Financial Markets
    It would be reassuring if we could blame the current speculative 
bubble on the arrogance, ignorance and ineptitude of the regulatory 
agencies with oversight responsibilities. If that were the case, we 
could just fire the commissioners and secretaries and clean up the 
problem. Unfortunately, there is a more fundamental problem that must 
be addressed. Federal authorities must look broadly at the conditions 
in modern financial markets that feed volatility, amp up volume, and 
increase risk and policymakers must impose new structural oversight on 
these markets to return them to their proper role, as institutions that 
help smooth the functioning of physical markets. They have become 
centers of idle speculation that do vastly more harm than good.
    Congress must recognize that certain commodities are fundamentally 
different. Energy is at the top of the list of commodities that have 
special vulnerabilities, but energy commodities are not alone. The 
transformation of commodity markets into speculative engines is hurting 
food commodities as well. The description I wrote of natural gas 
applies to greater or lesser degree to the entire energy complex and 
many food commodities.

        Because natural gas is a physical commodity that is actually 
        consumed (unlike a pure financial instrument), difficult to 
        store, and expensive to transport, natural gas markets are 
        challenging . . . The key elements identified are the supply-
        side difficulties of production, transportation and storage, 
        and the demand-side challenges of providing for a continuous 
        flow of energy to meet inflexible demand, which is subject to 
        seasonal consumption patterns.

        ``[T]he deliverables in money markets consist of a ``piece of 
        paper'' or its electronic equivalent, which are easily stored 
        and transferred and are insensitive to weather conditions. 
        Energy markets paint a more complicated picture. Energies 
        respond to the dynamic interplay between producing and using; 
        transferring and storing; buying and selling--and ultimately 
        ``burning'' actual physical products. Issues of storage, 
        transport, weather and technological advances play a major role 
        here. In energy markets, the supply side concerns not only the 
        storage and transfer of the actual commodity, but also how to 
        get the actual commodity out of the ground. The end user truly 
        consumes the asset. Residential users need energy for heating 
        in the winter and cooling in the summer, and industrial users' 
        own products continually depend on energy to keep the plants 
        running and to avoid the high cost of stopping and restarting 
        them. Each of these energy participants--be they producers or 
        end users--deals with a different set of fundamental drivers, 
        which in turn affect the behavior of energy markets . . .

        What makes energies so different is the excessive number of 
        fundamental price drivers, which cause extremely complex price 
        behavior.''

        Complexity of physical characteristics translates into a highly 
        vulnerable product in this commodity market.

        ``Although the formal analysis examines transportation costs as 
        the source of friction, the consumption distortion results 
        suggest that any friction that makes it costly to return a 
        commodity to its original owners (such as storage costs or 
        search costs) may facilitate manipulation.

        The extent of market power depends on supply and demand 
        conditions, seasonal factors, and transport costs. These 
        transport cost related frictions are likely to be important in 
        many markets, including grains, non-precious metals, and 
        petroleum products.

        Transportation costs are an example of an economic friction 
        that isolates geographically dispersed consumers. The results 
        therefore suggest that any form of transactions cost that 
        impedes the transfer of a commodity among consumers can make 
        manipulation possible.\20\
---------------------------------------------------------------------------
    \20\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, pp. 28-29

    These characteristics demand much more vigorous oversight of energy 
and food commodity markets than other commodities, especially financial 
instruments and precious metals that have few physical uses. 
Unfortunately, for about a decade we have had much less oversight of 
energy markets. More broadly, the transformation of commodity markets 
generally has created problems for physical markets. When commodity 
markets lose touch with the underlying physical market fundamentals, 
they do more harm than good.
    Physical traders get frozen out. I found this in my study of the 
natural gas market. The utilities that actually sell the gas to the 
consumer could not play in the hyper-inflated commodity markets. They 
simply tied their purchases to the indexes, hoped for the best and let 
the consumer suffer the consequences.

        There is a general consensus that utilities are not in the 
        markets as hedgers, although a small number are. Moreover, 
        there is a belief that hedging has declined, as volatility and 
        large financial players have moved into the market.

        ``Most utilities have stopped hedging and instead rely on the 
        fuel-adjustment clause that allows them to pass on to consumers 
        . . . Many utilities exited trading, Duke being the last one. 
        The point is they are not really in the game except for 
        Constellation, Sempra, Dominion and a few others. That more 
        customers are exposed to price risk because they are passing on 
        the higher costs to customers.''

        Cooper said many utilities probably have stopped hedging in 
        such a risky environment because they have to eat their losses 
        if they miscalculate. ``Utilities are not in the business of 
        predicting prices,'' he said. ``They don't care what the price 
        it. They pass it on to customers.''

        While the institutional context in which utilities function 
        certainly restricts their inclination to play in the financial 
        market, as volatility and prices mount, it becomes more 
        burdensome for all users. The cost of hedging becomes higher 
        and higher.

        But with gas above $10/mmBtu and futures market direction 
        unpredictable, even hedging and other risk management tools are 
        becoming more and more expensive--raising the question of 
        whether the benefit is worth the cost . . .

        For example, Invista uses financial derivatives, collars and 
        similar tools to hedge against current market conditions. But 
        gas at $10/mmBtu or higher and unprecedented volatility ``makes 
        all of these actions a little more costly,'' Poole noted. ``It 
        raises the question: is the elimination of price volatility 
        worth the cost?''

        And while Invista has the money and in-house expertise to 
        handle risk management activities internally rather than 
        farming them out to marketers or energy service companies, 
        ``unfortunately, for smaller-volume companies that may not be a 
        feasible option.''

        Tying prices to indices is the ultimate short-term strategy. 
        This institutional view raises concerns because the capital-
        intensive infrastructure of the industry has historically been 
        financed by long-term contracts. The deregulation and 
        unbundling of the industry inevitably shortened the time 
        horizon of the participant. Flexibility and choice loosens 
        commitments and makes ``bypass'' possible. Pipelines cannot 
        count on shippers as much as in the past. Utilities cannot 
        count on load as much as in the past. Merchants demand faster 
        recovery of costs.

        In fact, a major impetus for restructuring of the natural gas 
        industry was the high social cost associated with rigid long-
        term contractual arrangements . . .

        With the natural-gas sector restructuring . . . trading 
        arrangements have become much more short term and flexible in 
        both price and in terms and conditions. We have observed this 
        phenomenon throughout the natural-gas sector, from gas 
        procurement, gas storage, and retail transactions, to capacity 
        contracting for pipeline services.

        Long-term commitments to transportation and storage facilities, 
        exposes the contracting parties to greater risk in this 
        environment, especially where long-term commitments to supply 
        cannot be secured. The mismatch between the incentive structure 
        and the necessary time horizon results in missed opportunities. 
        For example,

        Jack Flautt, Managing Director of March & McLean, suggested 
        there is an anomaly in the storage investment area. It is 
        strange, in his view, that investors are not trampling one 
        another to participate in the storage development market. ``The 
        value of storage today is greater than at any time in my 
        lifetime,'' but Flautt reported he gets only blank stares from 
        bankers at the suggestion.

        The hesitance of public utility commissions to push utilities 
        to jump back in to long-term commitments is understandable and 
        the task of realigning risks is challenging.\21\
---------------------------------------------------------------------------
    \21\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, pp. 28-29

    The disutility of hyper-inflated commodity markets was recently 
underscored by a study of food commodities conducted by Texas A&M 
---------------------------------------------------------------------------
University.

        The increased activity in futures markets has had the 
        unexpected consequence of reducing producer's ability to manage 
        price risk using futures markets. The large influx of money 
        into the markets, typically long positions, has pushed 
        commodities to extremely high levels. But, these funds also 
        quickly move large amounts of money in and out of positions. 
        This has generated much more price volatility in the futures 
        markets. In response, the exchanges have increased the daily 
        move limits for most of the agricultural commodities over the 
        past 6 months. . . .

        The up and down volatility in the market and expanded trading 
        price limits mean that more margin calls occur. Small elevators 
        and even large grain companies and cotton merchants, who are 
        trading even larger volumes, not to mention farmers doing their 
        own price risk management, have been unable to make the margin 
        calls.

        Producers, elevators, and companies use bank financing to 
        finance their businesses and the price risk management. As the 
        margin calls have increased, they have exhausted their ability 
        to finance their normal hedging activities and have therefore 
        been forced out of the market.\22\
---------------------------------------------------------------------------
    \22\ David P Anderson, et al. The Effects of Ethanol on Texas Food 
and Feed, Agricultural and Food Policy Center, Texas A&M University, 
April 10, 2008, p. 32.

    Simply put, commercial entities that need the physical commodities 
to run their enterprises are priced out of the market. If you do not 
have deep pockets, are tied to the physical schedule of production and 
consumption, and live in the real world of bank finance, hyper-inflated 
commodity markets are a big part of the problem, not the solution.
Policy Responses
    The exchanges have come to serve the interests of the idle rich 
speculators by constantly adjusting rules to make it comfortable for 
the non-commercial entities to play their games and abandoned their 
role of providing liquidity to promote productive commercial 
enterprise. We need to deflate this speculative bubble and return these 
commodity markets to their proper role.
Oversight
    Congress has closed a loophole in the Commodity Futures Trading 
Commission Modernization Act that allowed energy commodities traded off 
exchanges to go unregulated. This foolish provision allowed the Enron 
debacle to spread broadly to energy markets and fostered dozens of 
other cases and uncounted thousands of abuses. Affectionately known as 
the Enron-loophole, Congress recently voted to close it, but that is 
not enough. Congress needs to make sure that this provision is 
implemented with extreme vigor. Large traders who trade in commodities 
in the U.S. ought to be required to register and report their entire 
positions in those commodities here in the U.S. and abroad. 
Registration and reporting should trigger scrutiny to ensure the good 
character, integrity and competence of traders.
    If traders are not subject to comprehensive reporting requirements, 
there will always be room for mischief that is out of sight to the 
regulator. If they are unwilling to report all their positions, they 
should not be allowed to trade in U.S. markets. If they violate this 
provision, they should go to jail. Fines are not enough to dissuade 
abuse in these commodity markets because there is just too much money 
to be made. We need mandatory jail sentences.
    Regulatory authorities must also require full auditing of private 
indexes. The FERC failed to impose this condition on the critical 
natural gas indexes and has been tied up in court over even modest 
transparency requirements. Federal and state regulators should refuse 
to allow indices that are not fully audited and transparent to be used 
in any ratemaking transactions. Unaudited indices should simply not be 
allowed to influence consumer costs in regulatory proceedings.
Incentives
    We need to restore the balance between speculation and productive 
investment. Public policy has made speculation much more attractive 
that investment in genuinely productive enterprise. Not only was energy 
commodity trading less regulated, it was also less demanding. Margin 
requirements on organized exchanges are a fraction of the margin 
requirements on stocks. If it is cheaper to put your money into 
speculation, why bother with real investment. The margin requirement 
for commodity trading among non-commercial traders should be fifty 
percent higher than the margin requirement for investment in stocks. 
However, we should impose less onerous terms on physical players and 
even scale the terms to the size of the position, so that smaller 
physical players can regain access to these futures markets.
    We must also set lower position limits and increase settlement 
windows so that individual players cannot influence price.
    We must level the playing field between long-term productive 
investment and short-term speculative gains. We need a tax on short-
term capital gains between 33 and 50 percent, (which reflects the 
difference in the net present value of income from on a one-year 
investment repeatedly flipped and the net present value of a stream of 
income an investment held for 10 years--discounted at the OMB suggested 
discount rates of 7 and 10 percent respectively), to make holding 
productive investments for long periods as attractive as flipping 
short-term financial paper.
Physical Markets
    While this hearing focuses on the financial markets, I would be 
remiss if I did not also mention the physical market. Again, my 
analysis of natural gas markets provides a broad framework for 
oversight policies to begin addressing the institutional flaws that 
have given rise to physical market problems.

        In the physical market, policymakers have allowed the supply 
        side to become concentrated and vulnerable to the exercise of 
        market power. Meanwhile, producers have been slow to invest in 
        exploration and development, compounding the problem of tight 
        supplies.

        The Federal Energy Regulatory Commission exacerbated the 
        problem by failing to ensure a transparent price reporting 
        mechanism. It deregulated markets and granted market-based rate 
        authority without requiring full and honest disclosure of 
        information or effective competition on the ground. In 
        retrospect, it appears that there have been repeated market 
        ``aberrations,'' but fraud and market manipulation are not the 
        only concerns. The ability of strategic behavior to influence 
        price because of structural weaknesses in market rules is a 
        more general concern.

        The position of the major oil companies with large holdings of 
        natural gas physical assets, dominance of natural gas 
        marketing, and active involvement in natural gas financial 
        markets poses a serious threat to consumers. The inadequate 
        investment in exploration over the course of a decade or more 
        contributed to the tight supply conditions. The massive 
        windfall of cash-flow in recent years dulls the incentive for 
        the majors to supply gas to the market. They can keep it in the 
        ground and hold out for higher prices. They are under no 
        pressure to sign long-term contracts, except at extremely high 
        prices. As major marketers and traders, they can move markets.

        The fact that the majors straddle these markets, several of 
        which are lightly or unregulated, compounds the problem, since 
        their ability to profit by taking contrary positions in various 
        markets is hidden from regulators. Policymakers must have the 
        information necessary to make informed judgments about whether 
        the major oil companies are exercising market power, 
        strategically in the long-term and unfairly exploiting the 
        tight markets they have helped to create in the short term.

        A joint task force of Federal and state anti-trust and 
        regulatory authorities should be formed . . .
Conclusion
    Vigorously enforced registering and reporting requirements will 
chase the bad actors out of the commodity markets and the margin and 
tax policies will direct capital out of speculation and into productive 
long-term uses. Creating a class of idle rich speculators, who are 
immune to the business cycle, was a huge mistake. Allowing this huge 
log of money to pump up the volume, volatility and risk has cost 
consumers dearly.
    Let us assume a modest estimate of $30 per barrel that is cited by 
industry analysts as the amount that the speculative bubble has added 
to the price of oil in the past 2 years and use my modest estimate of 
$2.50 per thousand cubic feet for natural gas. Since the Senate 
Committee on Oversight and Investigations issued its report, the 
speculative bubble in energy commodities has cost America well over 
half a trillion dollars. It is time to do something about it.
    The investigations of manipulation by the FERC and the CFTC, 
stepped up grudgingly in response to mounting political pressure, are 
woefully inadequate and looking for the wrong thing. This is not a 
question of manipulation, but a fundamental breakdown of the 
functioning of these markets. The FTC seems inclined to make the same 
mistake in its Advanced Notice of Proposed Rulemaking. We need much 
more vigorous action to reign in the speculative bubble and return the 
futures markets to their proper role to improve the functioning of 
physical commodity markets.

    Senator Cantwell. Thank you very much.
    And I, again, want to thank all the witnesses for 
testifying today and for your testimony, that can be submitted 
in full to the record.
    You know, I heard from many of you commenting about 
commodity indexes and the process by which the futures market 
operates, and I just want to make sure that I'm clear. If I 
could just ask each of you if you believe that the current 
price for oil is based only on supply-and-demand fundamentals 
or if it's based on other things, as well. If you could just 
give me a yes or no. Because I think I understand where each of 
you are, but I want to try to be a little more succinct about 
whether this is--the current price is based on supply-and-
demand only, or are we seeing other factors?
    Mr. Greenberger. Well, I'll take the first crack at that. I 
think the price is completely unmoored from supply demand. I 
don't want to discount supply demand; there is a supply demand 
problem. But, I think the vice president of ExxonMobil, who 
said that his judgment was that the price should be at $50 or 
$55, another oil executive said somewhere between $35 and $65--
the price of oil at the beginning of this millennium was $18 a 
barrel. Yes, it should be higher than it is, and we need to do 
all the efforts, more substitute energy, et cetera. But, we're 
paying, some believe, as high as 50 percent premium to the 
pockets of speculators who are operating in markets that are 
completely unpoliced. It's the equivalent of telling a 
community, ``The crime rate has been low. We're pulling the 
police back. They're too expensive. Be sure you lock your 
doors.''
    Senator Cantwell. I should have said, at the beginning, 
that I am going to do 5-minute rounds here, so--to try to keep 
us--a flow of members asking questions--so, if you could be 
succinct--so, I was just looking for, kind of, a yes or no on 
whether people thought it was----
    Mr. Greenberger. Sorry.
    Senator Cantwell.--the current price was only based on 
supply and demand, or other things were impacting it.
    Mr. Soros?
    Mr. Soros. There is definitely a speculative bubble that is 
superimposed on fundamental trends in supply and demand. That 
is not specific to the present moment, because this is in the 
nature of markets. Markets don't just passively reflect 
fundamentals. What speculation, or prevailing biases or 
misconceptions prevail in the market also affect the so-called 
fundamentals that markets are supposed to reflect. And 
occasionally they go into this self-reinforcing bubble mode, 
and I think this is what we are witnessing today in the oil 
market. But, we have seen it in housing--we see it all the 
time.
    Senator Cantwell. Mr. Ramm, do you have a quick answer to 
that? Dr. Cooper, do either of you have a quick answer to that?
    Mr. Ramm. The quick answer is no.
    Senator Cantwell. It's not just supply and demand.
    Mr. Ramm. It isn't.
    Senator Cantwell. Yes.
    Mr. Ramm. With respect to the fact that if you only look at 
the physical supply and demand, it would not base--get based on 
those fundamentals.
    Senator Cantwell. Dr. Cooper?
    Dr. Cooper. I'll be quite precise. Forty dollars for the 
physical cost of producing crude, the economic cost; $40 for 
the cartel tax that OPEC and the oil companies put on us; and 
$40 for speculation. So that two-thirds of the current price 
is, simply put, baloney.
    Senator Cantwell. OK.
    Ms. Watson, I know you're probably going to tell me you 
can't answer, so I'm not even going to ask you about that.
    So, Dr.--Mr. Soros, you, in your testimony, said that 
circumventing speculative position limits should be banned, 
provided that that ban can be applied to, you know, all 
markets.
    Mr. Soros. Yes.
    Senator Cantwell. You're basically saying that the 
speculation position, the lack thereof, is causing a great deal 
of what we're seeing--or could cause a great deal of what we're 
seeing in this bubble.
    Mr. Soros. Whenever you have outside speculators coming 
into a market on a very large scale, and particularly coming in 
on one side of that market, in present time on the buying side, 
they do distort the otherwise prevailing balance between supply 
and demand. So, the presence of financial speculation can--have 
some useful service in providing liquidity, but when it gets 
too big, it can unbalance the market, and that is why there 
should be limits on speculative positions, and those limits 
should bear some relationship to the size of the market that 
you are dealing with.
    The oil market is very big, but some of the agricultural 
markets are very small, and speculation can really play havoc.
    Senator Cantwell. Mr. Greenberger, do we have speculation 
limits on all U.S. oil-traded product?
    Mr. Greenberger. Absolutely not. We have them on some, but 
large portions not, because in 2000 this Congress said, ``You 
can trade outside of regulated exchanges.'' And, because of 
that Enron loophole, which I believe has not been closed for 
crude oil, there are no--no speculation limits in these markets 
that are unregulated. There's a second charade that an exchange 
located in Atlanta trading U.S.-delivered products is really in 
the United Kingdom, or Dubai, who's partnered with New York 
Mercantile----
    Senator Cantwell. But that is a U.S. commodity?
    Mr. Greenberger. Absolutely. They're trading U.S. West 
Texas Intermediate; 30 percent of the market is in a--is in an 
exchange that has no spec limits.
    And, by the way--Mr. Soros talks about index speculation--
we just discovered, in the last 2 weeks, that even our 
regulated markets are treating those banks and hedge funds that 
are in index positions as commercial interests not subject to 
speculation. My calculation is, right now, that at least 70 
percent of the U.S. crude-oil market is driven by speculators 
and not people with commercial interests. Most of those 
speculators do not have spec limits; they can buy whatever they 
want.
    Senator Cantwell. Thank you.
    Senator Dorgan?
    Senator Dorgan. Thank you very much.
    I just want to observe that the Commodity futures Trading 
Commission has seen an 8 percent decrease in its staff over 
time, and an 8,000-percent increase in commodity trading. Let 
me say that again, because some people think, in this Congress, 
and have for some while, that regulation is a four-letter word. 
This important regulatory body has seen an 8,000 percent 
increase in commodity trading and, at the same time, a 12 
percent decrease in their staffing level. That speaks volumes, 
in my judgment.
    Now, let me ask--Mr. Greenberger, tell me succinctly--you 
told us what's wrong, and suggested that, you know, the 
officialdom here is a dope, in terms of thinking they had 
closed the loophole. What steps would you take to address these 
issues?
    Mr. Greenberger. I have it in my testimony. I would go back 
to the status quo ante before the Enron loophole was passed. 
The status quo ante was, if you're trading energy futures in 
the United States, they must be traded on a regulated exchange 
that has speculation limits, margin requirements, et cetera.
    The Enron loophole told energy traders, ``Go--you can go 
wherever you want, there's no margin requirements and no 
regulated margin requirements, no spec limits, no large traders 
reporting.'' You--I've proposed adding two words to the 
Commodity Exchange Act: the words ``energy'' in two different 
places, and everybody who trades energy would, as Mr. Soros 
said, have speculation limits if they're speculators.
    Senator Dorgan. Yes. I think you alluded to it, but you 
know and I know that was not a deliberate policy--the creation 
of that loophole was not a deliberate policy debated by the 
Congress, it was, in my judgment, a shameful chapter of 
something being stuck in, in the midnight hours, in a large 
piece of legislation that was moving, and it has caused massive 
amounts of problems, and continues to cause significant 
problems.
    Mr. Greenberger. Absolutely. And, by the way, I should just 
add, Alan Greenspan advised against it.
    Senator Dorgan. Yes. Even a stopped clock is right twice a 
day, they say.
    [Laughter.]
    Senator Dorgan. Mr. Greenspan--and let me just----
    [Laughter.]
    Senator Dorgan. Let me also make the point that, while a 
lot of this speculation--and I mentioned subprime earlier--has 
been going on--a lot of folks, including Mr. Greenspan at 
this--at the Fed--sat at their chair without taking the kind of 
action that should have been taken.
    But, let me go to another point, if I might. I want to ask 
you about margin requirements. NYMEX and others will say, you 
know, ``We don't have evidence of unbelievable speculation. If 
it exists, it must be over on the dark side, it must be on the 
unregulated side.'' They say, ``Increasing margin requirements 
will do nothing.'' Respond to that, if you will, Mr. 
Greenberger.
    Mr. Greenberger. Oh, well, look, NYMEX says that because 
they treat investment banks and hedge funds as oil dealers. 
They're----
    Senator Dorgan. And they are not.
    Mr. Greenberger. Yes. Of course they're not. Thirty percent 
of what they deem to be oil dealers are Morgan----
    Senator Dorgan. I understand.
    Mr. Greenberger.--Stanley and Goldman Sachs. So, they say, 
``Wow. You know, we look at the speculators and they don't 
include one-half the speculators.'' Yes, if you impose margin 
requirements, it's an unfortunate thing that we have to talk 
about this, but speculators should have increased margin 
requirements.
    Senator Dorgan. You think it will be effective.
    Mr. Greenberger. It--as Mr. Soros said, it's a last resort, 
but we're desperate right now.
    Senator Dorgan. Mr. Soros, what should the increase in 
margin requirements be? I believe the margin requirement on 
stocks is about 50 percent. I think, on these contracts, it's 5 
to 7 percent. What do you suggest we do with----
    Mr. Soros. Unfortunately----
    Senator Dorgan.--respect to margin----
    Mr. Soros.--I'm really not an expert in the oil markets. I 
said that in my testimony. And so, I really can't express a 
view. I'm just not familiar enough with oil trading to be able 
to say.
    Senator Dorgan. Dr. Cooper, what do you recommend?
    Dr. Cooper. I want to make an observation. I did a report 
for attorneys general in four Midwestern states--Illinois, 
Iowa, Missouri, and Wisconsin. We looked at the natural gas 
market, and much of my testimony reflects our early--this was 
in March of----
    Senator Dorgan. Right.
    Dr. Cooper.--2006, a couple of months before the Permanent 
Committee came out with a similar finding. The fascinating 
thing was that, at the time, a puny hedge fund--and, let's be 
clear, Amaranth was not a very big hedge fund--a puny hedge 
fund had accumulated a massive position in the natural gas 
market, and the CFTC and the FERC did not have a clue. They 
were completely in the dark about this going on.
    Now, as we've heard, a year and a half later the FERC sort 
of starts to figure it out and fines these folks a little bit 
of money. And compared to these markets, it's a little bit of 
money.
    The simple fact of the matter is that you cannot let these 
people play. Enron loved its title. They called themselves 
``asset light.'' And everyone thought that was the neatest 
thing in the world, because, hey, if you don't have any----
    Senator Dorgan. Right.
    Dr. Cooper.--assets, you can really fool around. The simple 
fact of the matter is that if we tie trading to real assets, we 
will discipline the heck out of people who are running around 
in these markets.
    Senator Dorgan. Just one more quick point. Investment banks 
and others are taking large positions on this commodity where 
they have not previously taken positions. Then we hear Goldman 
Sachs say, ``We think it's going to be--it's going to go to 
$200 a barrel.'' Is there an impression, of anybody on the 
table, that if you look behind the curtain you'd see people 
taking long positions on oil and then making statements? Would 
that be surprising?
    Mr. Greenberger. Oh, Goldman Sachs is very, very long in 
these markets. As Mr. Soros said, these banks have gotten into 
the--these financial institutions have dominated this--markets, 
and they're on the long side. That's why the price is going up, 
and that's why commercial users who need these markets can't 
use them, because the price of these contracts are going 
through the roof.
    Senator Dorgan. Is it in their interest to predict higher 
prices?
    Mr. Greenberger. Well, I don't want to--let me just say, 
from my observation, I find it highly ironic that when you 
control the price of crude oil, that you can comfortably 
predict it will go up from $135 to $200. I find that to be more 
than a mere coincidence.
    Senator Dorgan. I have another round of questions, but my 
time is expired.
    Senator Cantwell. Thank you.
    Senator Snowe? Or, Senator Klobuchar?
    Senator Klobuchar. Thank you very much, Madam Chair.
    Mr. Greenberger, as I was listening to you rail, 
understandably, on the Enron loophole and how it's not really 
closed when it comes to crude oil, I was reminded of a forum 
that we had just a few days ago in Moorhead, Minnesota, where 
someone, who had just your tone of voice--he was just a retired 
guy that was standing there and saying, ``Congress keeps saying 
they're doing stuff, but they're not really doing stuff.'' So, 
what I want to get at right now is how we can really get 
something done here.
    And you talked, and Senator Dorgan just asked you a few 
questions, about the Enron loophole, so I--from my 
understanding of this in your testimony is that the first 
problem with it--put aside the crude oil--was that the way the 
language read in the farm bill, you saw that it just put too 
much burden on the CFTC to try to get to the bottom of it. And 
tell me about that and what the problem is with that and how 
that can be fixed.
    Mr. Greenberger. Before the Enron loophole passed, for 78 
years, the status quo had been, ``If you trade a futures 
contract, it must be regulated. If you want to get it 
deregulated, the trader has the burden to demonstrate that 
deregulation will not lead to fraud, manipulation, and 
excessive speculation.'' The Enron loophole said to all the 
speculators, ``Go wherever you want. You have no controls.'' 
The ``End the Enron Loophole'' says, ``On a contract-by-
contract basis, it is now the burden of the CFTC to prove that 
each contract should be regulated.'' So, it has to go through 
complicated administrative hearings, which I can tell you will 
be challenged vigorously by people who can afford to make those 
challenges, and will have to prove, by substantial evidence, 
that that contract will be regulated. Those decisions will be 
challenged judicially, that--it's a nightmare, and the CFTC 
said it knows of one contract, over the thousands in this area, 
that it believes should be brought out from the shadows of the 
Enron loophole.
    Senator Klobuchar. OK. Then the second thing--so, it's to 
change that language with the burden, but the second thing is, 
while the language covered crude oil, because of the CFTC's 
actions with these ``no action'' letters that Mr. Ramm was 
talking about, that that is also an additional problem. And I 
think this bill was introduced, which is Senate file 2995, that 
attempts to fix that, but you don't believe that it would fix 
it.
    Mr. Greenberger. I have----
    Senator Klobuchar. And you want to elaborate on that?
    Mr. Greenberger. I have a lengthy dissertation on that. 
There is now nothing in the law that sanctions foreign board of 
trades in the United States trading U.S. products being able to 
escape regulation. That legislation says, ``If the CFTC finds 
the home regulator comparable, it's OK for them not to be 
regulated.'' The CFTC, in May 2007, found the Dubai Financial 
Services Authority to have, quote, ``comparable regulation to 
the United States.'' So, that legislation will sanction----
    Senator Klobuchar. What they did.
    Mr. Greenberger.--what is now, in my belief, illegal, and 
will soon, if somebody wakes up, be invalidated either by a 
private individual being hurt by it, or a State attorney 
general. If you pass that, you'll block attorney generals from 
getting rid of that loophole.
    Senator Klobuchar. So, your argument is, which you just--
you gave your idea to Senator Dorgan--that the idea is to put 
the words ``energy'' back in so that we can actually go back to 
where we were before this--what Dr. Cooper calls ``the foolish, 
but affectionately called, Enron loophole'' got put into the 
law?
    Mr. Greenberger. Yes. Overnight, that will bring down the 
price of crude oil, I believe, by 25 percent. Now, there has to 
be a grace period, obviously, but it would say that anybody in 
the United States trading United States-delivered products must 
be subject to regulation.
    Senator Klobuchar. Mr. Ramm, is your idea consistent with 
what Mr. Greenberger has been saying? By the way, I think it's 
interesting for people to know, who are watching this, that a 
lot of people think gas stations have been making money, hand 
over foot, during these increased prices, and I think it's 
interesting to hear you talk about the fact that we need more 
regulation of speculation, because, in fact, it's not true.
    Mr. Ramm?
    Mr. Ramm. We are completely in agreement with rescinding 
the ``no action'' letters, because of the things that have 
happened to date. And, you're right, petroleum marketers are 
going out of business, farmers are going out of business. We 
can't get the capital to finance our receivables. Farmers can't 
get the capital to get the money to operate their farms.
    Now, I know that the CFTC has put out an announcement in 
trying to help with the Banking Committee to try to free up 
capital for farmers, but oil marketers won't be able to deliver 
that fuel, because they can't afford to buy it, to have 
receivables for it either. So, we'd be looking for some relief 
there also.
    Senator Klobuchar. OK. I just wanted to thank both of you, 
because I can tell you, I'm not going up and telling that guy 
yelling at the forum in Moorhead that Dubai is going to take 
care of him. So, thank you for your thoughts and ideas, and I'm 
sure we'll be using them as we go forward.
    Senator Cantwell. Senator Snowe?

              STATEMENT OF HON. OLYMPIA J. SNOWE, 
                    U.S. SENATOR FROM MAINE

    Senator Snowe. Thank you, Madam Chair. And I thank you for 
holding this hearing today on this very critical issue, and 
examining one of the--you know, most unexamined, unexplored 
areas, which is the energy futures market, that's certainly 
deeply disturbing and deeply troubling, certainly puts us at a 
tipping point in our economy with respect to the high energy 
prices. And I know, for my constituents in Maine, the questions 
that they are asking is exactly why this is happening, it's 
totally inexplicable, in terms of where we are today.
    As you said, Mr. Ramm, about home heating oil prices in my 
state, 80 percent of winter heat's derived from oil. Eighty 
percent. And the price currently is $4.50. You know, it went up 
a single day in May, according to my Maine oil dealers, 30 
cents in one day, 7 percent. It just doesn't--you know, it just 
doesn't stand to reason, it's not rational. And I'm concerned 
because clearly it represents a tipping point for America, in 
terms of its economy and for Americans. You know, we're talking 
about maybe, you know, $5,000 oil bills for the average Mainer 
or anybody using home heating oil next winter. And, I mean, 
that's now. We're not--we have no way of knowing what it's 
going to be next winter. You pay a cap price of $4.89 in Maine 
right now.
    So, this is deeply disturbing and devastating. I mean, it 
could place our economy in ruins. People are asking the 
question, why is this happening? And it is not based on supply 
and demand, and that's what I'm hearing. Would you all agree it 
is not--and that's the question that Madam Chair asked, and 
whether or not it's based on supply and demand. And it's not.
    And so, we've taken the first step in the farm bill. 
Senator Feinstein and I and Senator Cantwell introduced--that 
legislation became law several weeks ago. But, I'm concerned 
about the timidity of the agencies, as well, in not 
aggressively pursuing the speculation that's now pervasive.
    So, one of the questions I would like to ask is, with 
respect to the foreign board of trades, should we have the 
ability to limit their positions? You know, in fact, in one of 
our questions that we posed to the Commodity Futures Trading 
Commission recently in a letter that Senator Feinstein, Senator 
Cantwell and I submitted with respect to the West Texas 
Intermediate crude oil futures that now represent--31 percent 
of U.S. oil is traded on foreign markets. And this is in 
accordance with the response by the Commodity Futures Trading 
Commission. That's alarming. I mean, that is 31 percent. And 
so, we don't require the same standard for, obviously, foreign 
trades by, you know, future--by American oil speculators on 
foreign markets. Is that an area that we should be engaged in, 
and should we give the authority to the Commodity Futures 
Trading Commission to engage in that process?
    Mr. Greenberger?
    Mr. Greenberger. Senator Snowe, that is a staff--that 
foreign board of trade license to come into the United States 
and sell in the United States U.S.-delivered products but be 
regulated back home is a staff ``no action'' letter. 
Unfortunately, I'm embarrassed to say I wrote the template for 
it. It has 1,000 conditions in it. Under the present 
circumstances, it can and should be terminated this afternoon. 
It is--my view is, the way they have converted this limited 
license into a total exemption is grossly unlawful and makes no 
sense, and my view is, as Mr. Ramm said, it should be--if the 
CFTC doesn't come to its senses, which it could do--it's not a 
commission regulation, it's a letter; they could revoke it by 
the terms of the letter--then you must stop this, you must stop 
Dubai and NYMEX partnering, selling commodities in the United 
States on the assumption that speculation will be controlled in 
Dubai.
    Senator Snowe. So, is that the--is that something that we 
should be demanding immediately today----
    Mr. Greenberger. As I----
    Senator Snowe.--and that they could do it unilaterally?
    Mr. Greenberger. Oh, yes. And, as I read your letter, 
Senator Snowe, that's exactly what you asked. I have--I know 
that there are commissioners who would like to do it, but they 
don't have a control there. That can be ended. If they don't 
end it, you should end it right away.
    And by the way--I know you have limited time, I hope I can 
just expand--what the traders come in and say is, ``Oh, if you 
regulate us in the United States, we're going to go to Dubai 
and London.'' You know, that's phony baloney. I sat there, 10 
years ago, when 18 foreign exchanges came to me and said, ``We 
cannot survive unless we are in the United States. We need the 
United States investors and United States markets.'' They can't 
escape United States jurisdiction.
    And I must say, if that's the reaction of Goldman Sachs and 
Morgan Stanley and British Petroleum to the suffering that 
you're experiencing, they're not going to go to London, they're 
going to try and trade in the United States and make it appear 
they're in London. But, my view is, if they want to go to 
Dubai, God bless. The price of gas in the United States will 
come dropping down. We should wish them well.
    Senator Snowe. Well, I appreciate that forthrightness. And 
I think that is certainly something that we should be pursuing 
as soon as possible. Thank you.
    Thank you, Madam Chair.
    Senator Cantwell. Thank you.
    Senator Pryor?

                 STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Thank you, Madam Chair. I appreciate you 
having this hearing.
    Let me follow up, if I can, Mr. Greenberger, on what you 
were just talking about with Dubai and these other exchanges.
    As I understand it, the way it works is, in order to trade 
in oil commodities, you only have to put 6 percent of the 
capital down, and that is, what, a 16-to-1 ratio, something 
like that. Should we look at that? Is that a way to address 
this?
    Mr. Greenberger. It is ``a'' way, and I think it should be 
looked at for speculators. But, I think what Mr. Soros said is 
the historic, traditional answer in these markets. You need 
speculation to make them liquid, but you can't have 90 percent 
of the market be speculation, which I believe is the case today 
in West Texas Intermediate. The historic way, from 1922, with 
the Grain Act, passed by farmers--at the request of farmers, 
since 2000, when Mr. Gramm deregulated these markets, 
speculation limits were designed, contract by contract, to say, 
``Yes, speculators, come in, but you can only have a small part 
of this market. It's for Mr. Ramm. This market is for him to 
hedge his interests.'' And what we have now, I believe data 
will soon be released that, if you calculate, properly, the 
West Texas Intermediate market, you will see 90 percent of it 
is dominated by hedge funds, banks, endowments, pension funds, 
mutual funds, et cetera. They've taken over. And, as Mr. Soros 
said, you can't run the market like that. It's completely 
dysfunctional.
    So, I say everybody should be regulated, spec limits should 
be applied, and margin increase for speculators should 
definitely be looked at.
    Senator Pryor. The price of West Texas crude today is, 
what, roughly $130 a barrel?
    Mr. Greenberger. Well, interestingly enough, it touched 
$135 the day the CFTC announced that it would do something 
about it. By the end of the day, it was $126. So, it's 
somewhere between $125 and $130 right now.
    Senator Pryor. If we did the fixes that you're 
recommending, what do you think the price of a barrel of West 
Texas crude may go to?
    Mr. Greenberger. Well, I wish I could forthrightly predict 
that, because I wouldn't be here now, I'd be in a beach in Rio 
de Janeiro.
    [Laughter.]
    Mr. Greenberger. But, my prediction is--for whatever it's 
worth, is you'd get at least a 25 percent drop in the cost of 
oil, and a corresponding drop in the cost of gasoline.
    Senator Pryor. All right, and----
    Mr. Greenberger. Some people estimate 50 percent.
    Senator Pryor. Let me follow up on something that I know 
that Senator Dorgan feels very passionate about, and that is to 
stop putting oil into the strategic petroleum reserve, which we 
did, 2 or 3 weeks ago, and the President ultimately signed it. 
What impact will that have?
    Mr. Greenberger. Well, you know, OPEC, which is the biggest 
strategic petroleum reserve in the world, will not release oil 
into this market, because they believe that they can throw all 
the oil they want to throw at this market, but the speculators 
will continue to drive it up. My view is, if you don't control 
speculation, you can empty the strategic petroleum reserve and 
the price of oil will continue to go up. And that's why people 
say, ``Oh, we want green energy, we want biofuel.'' Well, the 
biofuel developers are going to need to hedge when they get 
their biofuel going, and what's going to happen when you get 
all this new, clean energy is, the banks are going to go into 
those markets and rob those guys blind, like they're robbing 
the gas-station owners and heating-oil dealers in this country 
right now. Small business people are tanking. The other day, I 
talked to Sean Cota, who's the head of the New England Fuel 
Institute, and I said, ``Sean, make sure you have someone at 
this hearing,'' and he wrote back and said, ``Michael, I'm in a 
meeting with Vermont oil dealers. Half of them think they will 
be gone as a financial institution by the end of this week.''
    Senator Pryor. If I----
    Mr. Soros. If I may----
    Senator Pryor. Yes, Mr. Soros.
    Mr. Soros. If I may point out that the additions to the 
index futures buying in the last few years has been a multiple 
of the additions to the strategic reserves, and that is the--
what I call the elephant in the room.
    Senator Pryor. Explain that, if you can, to the Committee.
    Mr. Soros. Well, that these institutions, acting as a 
herd----
    Senator Pryor. Right.
    Mr. Soros.--are accumulating much larger--or setting aside 
much larger reserves than the strategic reserve is.
    Senator Pryor. Right.
    Mr. Soros. Now, of course, it's not a physical reserve, and 
some people argue that, therefore, it doesn't affect the price, 
but I would differ, because I think it does affect the price. 
It has the same effect as other buying.
    Senator Pryor. OK.
    Dr. Cooper, let me ask you--it's a follow up to something 
you said earlier. You gave, kind of, a 40-40-40 to a price, I 
guess, of a barrel of oil. As I understand it, what you're 
saying is that, in your view, what, only about $40 is the real 
cost of a barrel of oil?
    Dr. Cooper. Yes, I'd pick the middle of the range that the 
oil industry is--has offered, up on the Hill here in the last 
few months. I mean, one set of executives said $50 or $55. Now, 
that's at the margin. Another executive recently said $35 to 
$60. So, the economic cost of producing and delivering a gallon 
of gasoline into my car is about $2.25, if you look at the real 
economic costs. And everything above that is funny-money, a 
combination of speculation and the exercise of market power. 
40-40-40 is, I think, a good representation of $120. The 
Institute for Energy, in Japan, recently looked at the year-end 
2007 and came up with the figure of $30 or $40 for speculation. 
The Senate committee came up with $25, but----
    Senator Pryor. Right.
    Dr. Cooper.--that was a couple of years ago.
    Senator Pryor. I understand.
    All right. Well, let me ask one last question. I'm not sure 
who this should be directed to, but maybe all of you can chime 
in if you feel like you should.
    There have been some reports that owners of crude-oil 
storage tanks and pipelines are using their knowledge regarding 
their inventories and the flow to make bets on the future. I 
don't know if you're aware of these reports. Supposedly, these 
owners are putting out misleading information in order to make 
trades and to profit on that misunderstanding. Again, I don't 
know if you're familiar with those. But, first, do you believe 
that some of that is going on right now? Second, these, seem to 
be manipulative and deceptive acts, and what should we do to 
make sure this doesn't happen in the future? Well, it certainly 
shouldn't happen right now, but what can we do to stop it? So, 
who wants to take a bite at that?
    Dr. Cooper. If you look at the report we--I did for the 
Midwest attorneys general--this was during the natural gas 
problem in 2006--the traders knew what was going on. I mean, 
they would look at the market, say, ``This is wacky,'' and they 
would identify--they knew there were people who were engaging 
in a variety of behaviors, which the CFTC and the FERC do not 
think is illegal--are illegal. Under the case law, it's really 
tough. But, the simple fact of the matter is that there is a 
whole range of trading practices, including--that's insider 
trading; I mentioned that in my list--which, in fact, pump up 
the price. They are not currently on the radar screen of these 
agencies.
    The best way to begin to address that is, one, expand the 
authority of the agencies, as you've done for the FTC. But, if 
you look at the FTC's Advance Notice of Proposed Rulemaking, 
they're getting ready to go down the same dead-end street that 
the FERC went. They're not really going to expand their power, 
they're just going to adopt the existing case law. But, the 
existing case law is inadequate to deal with the post-Enron 
problem in these markets.
    So, you need to expand those authorities, but you also need 
to find ways to tie these financial markets back to the 
physical commodities. We don't need to trade a barrel of oil or 
a methane molecule 30 times between wellhead and burner tip. 
That's excessive liquidity. That's too much liquidity. These 
markets are supposed to help us get physical commodities out of 
the ground and into our gasoline tanks. They're not there for 
people to make huge fortunes. Tie the trading back to the 
physical reality and you will dampen down the speculation.
    Senator Cantwell. Thank you.
    Senator Carper will be next, and then I know there are 
several members who have joined us who want to get in their 
first round of questions. I do intend to get a second round in, 
and hopefully still have us out of here roughly around noon. 
So, if members want to stay for a second round, that would be 
great.
    So, Senator Carper?

              STATEMENT OF HON. THOMAS R. CARPER, 
                   U.S. SENATOR FROM DELAWARE

    Senator Carper. Thank you, Madam Chair.
    Welcome. It's--you're good to come. We appreciate your 
presence, and we appreciate your testimony.
    About 2 weeks ago, we held a hearing in the Senate Banking 
Committee on a subject not dissimilar to the one that we're 
discussing here today. During the course of that discussion and 
testimony, the Members of the Committee, learned that there are 
three principal factors contributing to the run-up in oil 
prices. One of those is deemed to be the change in the value of 
the dollar, the drop in the value of the dollar relative to 
many other currencies in the world. A second factor was 
believed to be explained by supply and demand. The third factor 
was speculation. I don't know that I would say one factor is 
greater than the other. But, is--I've joined this Committee, 
sort of, in midcourse here during the Q&A--is that pretty much 
the--where you all are coming from, as well? Are those--is that 
a fair summary of your conclusions, too?
    [The prepared statement of Senator Carper follows:]

Prepared Statement of Hon. Thomas R. Carper, U.S. Senator from Delaware
    As we have watched oil prices break record after record, many of us 
have expressed concern about the impact of speculators on the price of 
oil.
    Just a few weeks ago, I asked Chairman Inouye to consider holding a 
hearing on this issue and here we are. I'd like to thank him for 
responding to my, and many of my colleague's, request so quickly.
    High gas prices are impacting Americans in many ways. 
Transportation is becoming a larger and larger portion of the household 
budget. And transportation costs are impacting the cost of everything 
from groceries to construction.
    There are many factors that go into the cost of gasoline. There is 
the cost of exploration of a finite and possibly dwindling resource. 
There is the cost of refining crude oil.
    There is increasing demand from developing nations, like China and 
India. There has also been for increasing demand here in the U.S., as 
vehicle miles traveled has increased 150 percent since the 1970s.
    But there is also the impact of market manipulation and 
speculation. We have seen speculators drive the Internet bubble and the 
housing bubble. And now speculators may be driving the cost of gas 
higher. But this speculation impacts every single American, hitting 
working class Americans the hardest.
    Today, we will hopefully learn what we can and should do to reduce 
the impact of speculation on the price of oil and make sure that the 
price is based on supply and demand. At the least, we need to make sure 
there is sufficient transparency in our markets and in the 
participants.
    If we act soon, this could help all Americans deal by lowering gas 
prices in the short run and prevent similar, unnecessary price spikes 
in the future.
    However, we have a larger challenge. Even if true market forces are 
at work, many Americans do not have the ability to opt out of the gas 
market.
    In many areas, if the price of something goes to high, people stop 
buying it. Then the market reacts and prices come down.
    But because of the way most communities have been developed and the 
limited transportation network we have provided, most Americans have no 
choice but to buy gasoline.
    Let's restore fair market forces to the price of gas. Let's ensure 
we understand who is investing in gasoline and why.
    But as we discuss climate change and the reauthorization of the 
transportation bill next year, we must provide Americans with 
transportation options so that they can save money on gas, reduce 
demand and maybe reduce prices too.

    And let's just start with Mr. Soros.
    Mr. Soros. Well, it definitely--I spoke about the backward-
sloping supply curve; that is to say that oil-producing 
countries find it and have no incentive, or less incentive to 
convert their oil reserves underground, which are set to 
appreciate in value, into dollar reserves above ground, which 
have a tendency to lose their value. So, that is a very 
important factor in creating the current upward pressure on oil 
prices. Generally, the institutional demand for these commodity 
futures indexes is also a flight from currency. The dollar has 
lost its position as the unquestioned, undoubted storer of 
value reserve currency, and there is no suitable alternative to 
it. Therefore, there is a general flight from currencies and a 
search for commodities. And so, the commodity--this is a very 
important element in the commodities movement that you're 
currently----
    Senator Carper. Thank you, Mr. Soros.
    Mr. Greenberger?
    Mr. Greenberger. I agree with what Mr. Soros said, and I 
agree with what--the assessment you articulated. And I happen 
to believe that there's a correlation between the weak dollar 
and excessive speculation. The day that the CFTC said it might 
do something about this, the--it was announced that oil went 
down $4.41. But, that was looking from the prior day's price. 
It went down about $7 that day. The dollar went up. The dollar 
went up.
    If we could get our oil prices under control, it would--and 
our farm prices and our--by the way, the subprime meltdown all 
leads back to this deregulation. The critical instrument of 
credit default swaps freed by this act would have been 
regulated but for this act. If we could get these things under 
control, I believe the dollar would strengthen. And so, there's 
a correlation between speculation killing the economy and that 
reflecting itself in the U.S. dollar not being what it should 
be.
    Senator Carper. Thank you.
    Mr. Ramm?
    Mr. Ramm. I do agree that those are three major components 
of price today. In the area of supply and demand, it's kind of 
ironic that probably the largest cost increase in bringing 
supply to the market is petroleum--is the cost of petroleum, 
because it's forcing prices to go up on every service rig, 
every exploration job, and it's causing prices to go up, so 
it's making the cost of oil go up, by itself.
    In regards to the currency, another ironic thing is that as 
the dollar has fallen--and it has, because of oil being traded 
as a U.S. currency, globally--it has taken a hit on--especially 
for the U.S. citizens. But, as Mr. Solos said, as that money 
has left those traditional markets, it has flowed into the 
commodity market. And he has also said that it's the elephant 
in the room; that amount of money, compared to the futures 
market, is huge. It's absolutely huge. Not as big, when you 
would go back to the currency market.
    And then, the last would be speculation, because that, in 
itself, is one of the feeders of the commodity that they need, 
which is cash, for excess speculation.
    Senator Carper. Right.
    Ms. Watson--my time's just about to expire--and Dr. 
Cooper--just briefly, if you would, please.
    Ms. Watson. I really can't address that on behalf of FERC, 
since it's not under our jurisdiction.
    Senator Carper. All right, thank you.
    Dr. Cooper. 40-40-40. Forty dollars for the economic cost 
of----
    Senator Carper. You're good at sticking on my----
    Dr. Cooper. Well, you know, but----
    Senator Carper.--staying on----
    Dr. Cooper.--it's----
    Senator Carper. We can learn from you.
    [Laughter.]
    Dr. Cooper. The evidence clearly supports those three 
numbers. OPEC is only defending $80 a barrel, so the most 
recent $40 is coming from someplace else. The Senate Commerce 
Committee, the Senate Oversight Investigations Committee, found 
$25. So, it's quite clear, the oil companies have testified to 
something in the neighborhood of $40 per barrel for the 
economic costs. So, these numbers are straightforward. They're 
there on the table. We have to deal with them.
    And I would love to fix the supply and demand. That's 
tough. That's a long-term issue we've talked about. I know I 
can deal with the speculation if I roll up my sleeves, assert 
the national authority of the U.S. Government, as Professor 
Greenberger has suggested, to regulate the commodities that are 
traded here.
    The United States accounts for one-quarter of all the 
gasoline consumed in the world. If we regulate this market 
well, we will whip the rest of the world into shape, as opposed 
to abandoning our authority to foreign governments and private 
corporations.
    Mr. Soros. May I----
    Senator Carper. Mr. Soros?
    Mr. Soros.--respectfully disagree with this 40-40-40, which 
I have now heard too many times. I just think that is an 
exaggeration. I think that there are very serious underlying 
factors for the rise in the price of oil. And, while it would 
be desirable to deal with the fraud on top of those factors, we 
should not lose sight of the underlying problems that need to 
be addressed, as well.
    Senator Carper. Thank you.
    Thanks, Madam Chair.
    Senator Cantwell. Senator Thune?

                 STATEMENT OF HON. JOHN THUNE, 
                 U.S. SENATOR FROM SOUTH DAKOTA

    Senator Thune. Thank you, Madam Chair.
    Let me ask that question another way. If, let's say, today 
a price per barrel of oil is $130. Without the role of 
speculation, what's that price?
    Dr. Cooper. I think it goes down 25 percent, which is about 
$40. There's a tremendous speculative premium that's been 
inserted into the price of oil over the--essentially over the 
last 6 or 7 years.
    Mr. Greenberger. Yes, Sunoco--ExxonMobil and, I believe, 
Sunoco recently said $35 to $65, $50 to $55. There are a legion 
of economists who believe that there is at least a one-quarter 
speculative premium that has nothing to do with supply demand. 
And given what these oil companies are saying--and, by the way, 
many of these oil companies are just as angry as Mr. Ramm is--
they can't hedge, either. These airlines can't hedge anymore. 
These markets are not hedging, they're gambling casinos. 
They're not for commercial interests anymore. So, it would go 
down, and it could go down very quickly if, as Dr. Cooper said, 
we rolled up our sleeves. This is not a hard problem.
    Senator Thune. And I've seen different assessments, too, 
and attempts to quantify the impact of various parts of this 
equation. What--in terms of the weak dollar, what is the--what 
would you say is the impact on the price per barrel of oil 
attributable to the fact that the dollar has been substantially 
below where it's been, historically?
    Mr. Greenberger. Well, I think Mr. Soros explained that 
about as well as it can be explained. If you're holding an 
asset that you control the price of, and you can drive it up--
Morgan Stanley is, I am told--Senator Snowe may know better--
the largest holder of heating oil in New England. They don't 
want to release it, because if they can control the price--and 
they're obviously doing a great job, Senator Snowe is telling 
you; in May, heating oil is going up--they don't want to 
exchange it for the U.S. dollar. The U.S. dollar is going down. 
That's a bad trade. So, what do they want to do? They want to 
hold it. And that is--if there is a supply demand problem, it 
is a question of hoarding, here. The speculators are not just 
placing bets in these futures markets, they're saying, ``Gosh, 
if I can control the price of heating oil, I'm going to go out 
and buy heating oil.'' So, you have Morgan Stanley as the 
biggest heating oil owners in New England.
    Mr. Soros. If I may, I think it is a little misleading. The 
way we are presenting it now, because let us say that there is, 
and I believe that there is, a speculative froth in the price 
of oil, and it has really developed in the last few months, and 
you really see it. But underlying it there is this problem that 
the cost of replacing the existing oil supply is rising, it is 
becoming increasingly costly, and the oil fields are aging, in 
that their depletion is accelerating. And there is this upward 
pressure on demand--also a real force which we didn't mention--
the rising standard of living in the developed world, and the--
against this, if you now head into a recession, prices would--
the price of oil would come down. But, once you come out of the 
recession, it would go up again. So, there is an underlying 
problem, and there is really a need to develop alternative 
sources of energy. We do have, also, global warming, which is a 
very serious problem. So, while we are focusing on the 
speculative excesses, we should not lose sight of these 
underlying problems.
    Senator Thune. And I don't disagree. There are 
fundamentals--market fundamentals, obviously, that are 
impacting this, but there's nothing that has, probably, has 
more of an economic impact on my state than the price of 
energy. I mean, we are a cold weather climate, we are a 
geographically dispersed population, travel long distances, and 
we're very--agriculture is our number one economy. So, this is 
an issue that we've really got to get our arms around.
    Now, you--Dr. Cooper suggested the margin requirement for 
commodity trading among noncommercial traders should be 50 
percent higher than the margin requirement for investment in 
stocks. Would that balance the role of speculative investment 
and productive investment?
    Dr. Cooper. I base that number on a--I did a simple little 
discount question of how much a dollar depreciates over 10 
years when it's put into a long-term asset versus being 
flipped, year after year. I did that at the two OMB-mandated 
discount rates, to simply get an idea of what it takes to 
balance the attractiveness of that short-term ``flip it every 
year and collect the returns'' versus ``hold it for 10 years 
and earn a normal return.'' So, that simply reflects the time 
value of money between a 1-year investment and a 10-year 
investment. I would encourage the Committee to look for other 
things. We used to have a short-term capital gains tax. And in 
a capitalist economy, the single most powerful instrument of 
directing investment is tax policy. That's basically all you've 
got if you want to rely on a broad market approach. So, I think 
that's an important thing to consider so that we rebalance the 
attractiveness of the short-term flipping, which is what's--
became quite a phenomenon in the housing market and long-term 
investments. We tell consumers, ``Invest long term.'' We have 
to balance this playing field so that we can get the returns on 
the long-term investments.
    Senator Thune. Madam Chair, I know my time's expired. I'd 
like to ask some more questions. Maybe I could submit those, if 
possible, for the record.
    But, thank you all very much for your testimony.
    Senator Cantwell. Thank you, Senator Thune.
    Senator Nelson?

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Madam Chairman, I have just returned from 
my state of Florida, having done 18 town hall meetings, and I 
can tell you that people are frustrated. It doesn't make any 
difference if you're in the urban parts of our state or in the 
rural parts of our state, they're frustrated. That frustration 
is turning into anger, and a lot of it has to do with the price 
of gas. It is incumbent upon us--as I was constantly attacked 
in these town-hall meetings by people that were sent there by 
certain special interests to say, ``Well, the solution is just 
for us to drill more.'' Well, of course--here's a chart. From 
1994 to 2007, the red bars indicate the drilling permits that 
were issued. The more drilling permits that were issued in 
these latter years of 2004, 2005, 2006, and 2007--and you can 
see the graph--the price of gasoline keeps going higher and 
higher, which would defy those who want the easy solution of 
``just drill more.'' This is the broken record that I talk 
about all the time, about going to alternative sources of 
energy, and so forth.
    Now, I want to ask these wonderful experts that we have 
here. What is the relationship between the fact that the 
federal funds rate has been dropping--on September 15, federal 
funds rate was at 5.25, and then it's dropped all the way to 2 
percent in 9 months, and yet, can you share why, if you're 
making easier money, is the price of gas--is there a relation 
between the two?
    Mr. Soros?
    Mr. Soros. It's a very, very indirect relation, because the 
drop in Fed funds, which reflected the slowdown in the economy, 
led to a decline in the value of the dollar, which then 
reinforced the upward pressures on us. So, that would be the 
connection. It's an indirect connection.
    Senator Nelson. All right, and that's also, then, another 
way of saying that if we want to stop this indirect increased 
cost of oil as a result of the weakness of the dollar, 
ultimately we've got to get our economic house in order----
    Mr. Soros. Yes.
    Senator Nelson.--and balance the budget.
    All right. Mr. Greenberger, let me ask you. Is the Dubai 
Financial Services Authority--have they ever initiated an 
enforcement action for manipulation in the commodities markets 
that they regulate?
    Mr. Greenberger. In candor, I can't answer that question, 
but I will tell you, as a member of the Worldwide Regulator 
Conference, the fact that Dubai regulators would be deemed 
comparable to the United States is laughable. It's laughable. 
They may have brought enforcement actions, but, again, are you 
going to go to Florida and tell your constituents, ``Don't 
worry about a thing, we've got Dubai on the case''? That'll 
make them angry, I think.
    The second thing I do want to make clear is--well, two 
points. You know, this Fed funds rate issue is all--we're not 
talking about it today, but the subprime meltdown is integrally 
involved in further deregulated instruments, credit default 
swaps, which, prior to this passage of this 2000 act, would 
have had to be regulated, there would have been capital 
reserves, people would have been looking over people's 
shoulders. Those toxic instruments are now being taken, that 
nobody else will buy, by the United States Federal Reserve in 
exchange for U.S. treasuries.
    And when you say about the weakening of the U.S. economy, 
the United States--you and I are holding those instruments as 
collateral for treasuries that are being given to banks. And 
the Fed funds rate is really a mirage. People are pulling their 
hair out. The true indication of what interest rates are is the 
London interbank daily rate, which is basis point--
historically, basis points higher than the Fed funds. Why is 
that? Because nobody believes that they want to lend to these 
banks, because they are not--you know, Bear Stearns collapsed, 
Lehman Brothers is going out, asking for another $300 million.
    So, what I'm saying to you is, your job is not just with 
this energy stuff. The farm crisis points back to this; the 
housing crisis; and if we're going to put our economy in order, 
yes, we should balance the budget; but we can't let this 
gambling casino continue and see the Bear Stearnses of this 
world, and other banks who are teetering on the brink and need 
the help of the Fed at the discount window, and raises serious 
problems, that's why our economic situation is held in ill 
repute, and why the dollar is sinking, in my view.
    Senator Nelson. We had a little victory, a week and a half 
ago in the farm bill, on creating more oversight in the 
Commodities Futures Trading Commission. I take it you don't 
think that's going to do much for the price of oil.
    Mr. Greenberger. Yes, because the CFTC has said it does not 
affect West Texas Intermediate contracts, because those--even 
though they're sold in the United States by United States-owned 
or affiliated entities, they're traded--they're controlled by 
London and Dubai, and you cannot use the farm bill amendment to 
regulate those products.
    And I've earlier said, Senator Nelson--I'd be happy to talk 
to you further; you can read my testimony--the farm bill puts 
the burden on the public to prove that there's regulation. The 
public can't afford to go through lengthy administrative 
proceedings on a contract-by-contract basis. The old rule, 
before Senator Gramm got his CFMA through, was that the traders 
had to prove they should be deregulated, not that the public 
had to prove there should be regulation. The CFTC has said that 
farm bill amendment will affect one out of thousands of energy 
contracts.
    Senator Nelson. Thank you.
    Thank you, Madam Chair.
    Senator Cantwell. Mr. Greenberger, I just want to be--I 
want to be clear, because there's something that some people 
might find confusing, and that is, on U.S. products, we 
obviously believe that if you're selling U.S. products, they 
ought to be regulated in the United States. And when you are--
as the United States wants to do, selling in some other 
country, we can do that, but then we are under the regulations 
of those markets. Is that correct?
    Mr. Greenberger. Well, it is correct, but it's a little 
more complicated than that. And, quite frankly, that led to the 
whole foreign board of trade issue. Some countries said, ``If 
you lightly regulate our exchanges coming into your country, 
we'll lightly regulate yours.'' But, the fact of the matter is, 
that is going all in one direction. All the liquidity is in the 
United States. It is very important that we not just let these 
Dubai exchanges that have partnered with our own exchanges, or 
ICE, which is in Atlanta, Intercontinental Exchange, be treated 
by the United Kingdom--they're robbing us blind. There are no 
spec limits, there are no position limits, there's no large 
data trader reporting. That could be stopped this afternoon.
    In other words, the comity we tried to create, and the 
fairness, has been, in the last 7 years, just made into a joke, 
and we've literally gotten undressed in front of the rest of 
the world, and let them do what they will with our gas-paying, 
oil-paying economy.
    The final point I want to make, Senator Cantwell--and I 
don't want the sun to rest before I say this--I agree 
completely with Mr. Soros, and I don't want to be 
misunderstood. There are serious supply demand problems here. 
Environment causes--our need to control the environment causes 
some of it. What I am saying is, there's an unnecessary 
premium. And when I say things would be easy, I think we could 
knock that premium out overnight if people were of good faith 
and brought all this under the kind of regulation that this 
country saw for 78 years, from 1922 to 2000, control 
speculation. We've abandoned that completely.
    Senator Cantwell. Thank you.
    I actually have a question for Ms. Watson, and that is--
obviously, part of the concern that's been discussed here today 
is how the futures market impacts the physical supply, and that 
was an issue, as we saw with both Enron and Amaranth, as it 
relates to both electricity and natural gas markets. When we 
gave FERC this new authority to stop manipulation, you were 
able to waive the required 30-day notice and implement the rule 
immediately. Is that correct?
    Ms. Watson. Yes, it is.
    Senator Cantwell. And so, you were able to do that, I 
think, because----
    Ms. Watson. We were able to show that we had good cause. At 
the time, it was in early 2006, and the Katrina--of course, the 
hurricane that hit in 2005, we were concerned about what might 
be happening still, as a result, on prices, and also, it was in 
the middle of winter of 2006, so we asked to waive the 30-day 
time period so that we could implement the anti-manipulation 
regulations immediately.
    Senator Cantwell. So, in effect, the FTC should be able to 
do the same thing. I mean, I would assume that they have even 
more history and knowledge, given what you've been able to 
accomplish in the electricity and natural gas markets.
    Ms. Watson. I can't speak for the FTC, I can only tell you 
what our--what we did.
    Senator Cantwell. Mr. Greenberger, would you say the FTC 
has a clear mandate to implement, and perhaps even to--you 
know, good cause to implement an interim anti-manipulation 
rule, given that it's such an urgent situation on prices?
    Mr. Greenberger. Absolutely, and for several reasons. One, 
they're being asked to do in the crude oil markets what FERC 
did in the natural gas markets. FERC has already set up the 
template. They put out this crazy Advance Notice of Public 
Rulemaking that makes--and the American Petroleum Institute 
came out and said, ``Gee, you only gave us 30 days notice.'' 
Covington & Burling came in and said, ``We need 90 days to 
answer these questions, not 30 days.'' Covington & Burling 
could answer those questions overnight if they--if it was in 
their economic interest, I'll tell you that. But, the--this 
procedure that the FTC has set upon means there's not going to 
be a rule til the early fall. They have the FERC template. All 
the questions they've asked have been answered by FERC. They 
don't need this fancy-dancy academic exercise.
    And number two is their good cause--the FERC representative 
talks about Katrina and what was happening in 2006. Senator 
Nelson, what's happening in 2008? This is a national crisis. 
There is room in the Administrative Procedures Act for good 
cause, when the public will be harmed by delay, for the agency 
to move quickly. I've put this in my testimony. The FTC, quite 
frankly, should be kicked in the rear end and get them moving 
on this thing.
    Senator Cantwell. Thank you.
    Senator Dorgan?
    Senator Dorgan. Mr. Greenberger, are we likely to expect 
the current head of the CFTC to address these problems 
aggressively?
    Mr. Greenberger. Well, he certainly tried to give the 
appearance of it by his so-called May 29 release. I have my 
doubts. I think Senator Cantwell referred to this. Many of the 
commitments--he's dealing with an Atlanta-based exchange 
trading U.S. products, and he's gotten down on his hands and 
knees and said to the British and to this exchange, ``Would you 
please give us the data we need?''
    Senator Dorgan. Do you think he's part of the problem 
rather than part of the solution?
    Mr. Greenberger. I most certainly do. I hate to say that, 
because I like him as a person very much. But, you must recall, 
he's was the Staff Director of the Committee that produced the 
regulation that puts us in the food crisis, energy crisis, and 
housing crisis we're in today. I think he has a vested interest 
in saying they did the right thing when they deregulated all 
these markets.
    Senator Dorgan. The cost of ineffective regulators--the 
cost of regulators who come to government, not liking 
government, and wanting not to regulate, is dramatic. We've 
seen it in the Enron scandal, we've seen it, in my judgment, 
now with those in a regulatory capacity who are supposed to be 
the referees. After all, a free-market system works only if you 
have referees to call the fouls. We have seen now plenty of 
evidence that those who have come to government not believing 
in the central mission of the agency they run have done great 
damage to our economy.
    Mr. Soros, I have read your most recent book, and, in fact, 
was writing a piece, myself, on credit default swaps and those 
kinds of issues the other evening, and especially about hedge 
funds, generally. And then I saw your income last year. I was 
going through Alpha magazine. And you did very well last year, 
$3 billion. That's $250 million a month in income, running a 
hedge fund. Is that correct?
    Mr. Soros. Yes, that is----
    [Laughter.]
    Mr. Soros.--that was why----
    Senator Dorgan. That's pretty well defined as ``success,'' 
I would guess.
    I also--is any of that coming from speculative trading in 
oil contracts?
    Mr. Soros. No.
    Senator Dorgan. OK.
    Mr. Soros. No, I'm not a participant in the oil----
    Senator Dorgan. I did read, recently--and I don't know 
whether it was an interpretation of what you said or what you 
said--I did read that you were reported to have said, ``This 
bubble will burst, the current price of oil is not destined to 
remain''--that this is a bubble, and it will burst. Is that an 
accurate reflection of what you----
    Mr. Soros. No, I think it was----
    Senator Dorgan.--think will happen?
    Mr. Soros. That was probably a distortion of the testimony 
which I gave today, which is really that there is a bubble 
element. There's a froth. But, also there are some fundamental 
factors behind it.
    Senator Dorgan. Yes. And I don't think there's disagreement 
about that. There is the general issue of energy, supply 
demand, you know, 300 million additional Chinese and citizens 
of India that are going to drive vehicles, and they're going to 
need to fuel them, and so--so, I understand all that. But, this 
issue today is about, What is the speculation, on top of that, 
that's driven these prices up?
    Mr. Greenberger, I want to ask you a question that you 
referred--you referred to this, just briefly. We have been 
told, ``If you increase the margin requirements for these 
contracts in this country from 5 to 7 percent, increase those 
margin requirements somewhere up the line, this will just all 
migrate and it'll--all this business is going to migrate.'' You 
say that's total nonsense. Describe to me why that's nonsense.
    Mr. Greenberger. Well, first of all, if spec limits were in 
place, some of that business wouldn't be here, to begin with. 
In other words, as Mr. Soros has said, I believe, and as I'm 
saying, is--we have too many speculators, these markets are 
dysfunctional. For 78 years, we limited speculation. So, it's 
got to migrate, to bring the markets back into shape.
    But, second, Senator, I have--will tell you, every 
exchange--I have this detailed in my testimony--any worldwide 
exchange worth its salt wants U.S. terminals, they want to be 
in the United States. And when they say they're going to 
migrate, what they tell you is, ``Well, we're using computer 
terminals, but we're going to come up with a fancy technology 
that you don't even know about. We'll sit on Wall Street and 
appear to trade in London and Dubai, and therefore, you'll lose 
this business.'' It is a classic proposition of the Justice 
Department, of which I happily served, and the Commodity 
Futures Trading Commission, that if you distort our markets 
illegally, wherever you are in the world, we will come after 
you and prosecute you. Maybe you'll go, like Mr. Vesco, 
somewhere where we can't extradite you, but if you can be 
extradited, you're going to be brought back. So, if these guys, 
who are sort of sticking it in the--their finger in the face of 
the American consumer, saying, ``Don't regulate us or we'll 
leave the country''--if they leave the country, and they do 
this, an aggressive, effective regulator or prosecutor will 
hunt them down and bring them back. They can't escape our 
regulatory mechanism. And I think----
    Senator Dorgan. But----
    Mr. Greenberger.--it's an insult and disloyal to the United 
States of America to say, ``To help the consumer will drive us 
to go elsewhere and hurt the American economy.''
    Senator Dorgan. But, they say they can escape because you 
can't see them and you can't find them. It's also the case, 
isn't it, that, at least a sizable American company was one of 
the founders of the Intercontinental Exchange. So, the point is 
that they say--those of us that have said--and I've been 
speaking on the floor about this a lot, about the need to 
increase the margin requirement--they say, ``You do that, 
number one, and you'll just drive these folks back into the 
shadows, and you won't find them.'' You're saying that that's--
that that cannot, and will not, be the case.
    Mr. Greenberger. The founders of the Intercontinental 
Exchange were Goldman Sachs, Morgan Stanley, and British 
Petroleum. Our--what--if--you know, if they go--first of all, 
those guys aren't going to abandon their summer homes in the 
Hamptons, I can assure you that; they're going to be here. 
They're going to be trading here. If they pick up the phone and 
call in an order to London, they're trading in the United 
States, and they're subject to regulation. They will not, they 
cannot--and the further point is, it is an economic reality of 
these markets that you cannot maximize your profits, or, for 
that matter, even create liquidity, unless you're here in the 
United States. Eighteen of these exchanges came, on their hands 
and knees. I had the head of the London International Futures 
Exchange in tears because we weren't letting him trade in the 
United States fast enough.
    Senator Dorgan. I want to have further conversation with 
you at some point this week, if I might, but I----
    Mr. Greenberger. Sure.
    Senator Dorgan. Let me just thank all of the witnesses. I 
think it's been a good hearing, and I appreciate it.
    Senator Cantwell. Thank you.
    Senator Klobuchar?
    Senator Klobuchar. Thank you.
    Mr. Soros, you talked about peak oil, and I know that 
Senator Nelson asked you some questions about drilling. This is 
something people bring up all the time in my state that maybe 
we can get more drilling going. And there is some more going, 
say, in Senator Dorgan's state of North Dakota; there are some 
efforts that we're supportive of. But, this idea that the known 
oil reserves are being depleted, that our country only has 2 
percent, I believe, of the oil reserves--you say that the word 
``peak oil'' is misleading. Do you want to elaborate on that a 
little on this line of issues?
    Mr. Soros. Yes. ``Peak oil,'' taken literally, means that 
at some point the total volume of production declines. And that 
may not be the case, because if you spend more money, you can 
always--not always, but you can still increase production. 
``Peak oil''----
    Senator Klobuchar. This is like an enhanced----
    Mr. Soros.--is a misleading word. But, the underlying fact 
is that most of the existing oil fields are now aging, and the 
rate of depletion increases as they get older. And you--because 
of the rise in demand and the rise in the price, we now use 
various techniques of recapturing more oil. That has a tendency 
to sort of come to a certain sharp point where suddenly the oil 
field runs out. So, for instance, in Mexico there's a very 
large oil field where the production has dropped by 25 percent 
in 1 year. So, depletion is a very big problem.
    And, at the same time, of course, you have to go deeper and 
deeper in for instance, in Brazil there's a major new 
discovery. It's the most important new oil field that has been 
found in many years. But, it's extremely difficult to reach, 
and it's going to be very expensive to exploit.
    So, these are the basic facts. And there is something like 
``peak oil'' that is occurring, and when you add to that the 
very real problem of global warming, which, could be fatal to 
our civilization, we must develop alternative supplies of 
energy, other than oil, and there is no escape from that. And 
probably cheapest and most abundant source of alternative 
energy is coal, but coal is extremely polluting. There are ways 
of taking carbon out of coal; however, that costs money. And 
you don't, at the present time, have a price on carbon that 
would justify taking carbon out of coal. That is a problem that 
is confronting us, and we have not dealt with it. And that, in 
my mind, overshadows everything else.
    Senator Klobuchar. Right. I think one of the things we're 
trying to get at here is--you know, people I--talk about it in 
Minnesota, but also that there's money that's going to places 
that it probably shouldn't. But, maybe we can fuel it into what 
you're talking about, this development of new technology and 
cleaner coal and solar and wind. And that's what we're trying 
to get at. And we've been, as you know, blocked, time and time 
again in Congress right now, from doing that. And I just 
wondered----
    Mr. Soros. But, you know----
    Senator Klobuchar. Go ahead.
    Mr. Soros.--it does mean that the cost of energy is going 
to be higher. We have to bite the bullet, as far as that is 
concerned, and we have to adjust our way of life.
    Senator Klobuchar. I think that people have gone beyond 
Jimmy Carter with the sweater, gloomy, saying that conservation 
is going to be hard. I think that they see this as a huge 
economic burden to them right now, and they are more interested 
in looking at whatever it is, mass transit or different things. 
We just--their report came out today, 10 percent increase in 
mass transit as ways of dealing with this. But, I just wanted 
to get, quickly, your response to what Mr. Greenberger says, as 
we get pushback on the margin, the ideas of increasing the 
margin, or also on further closing the Enron loophole for crude 
oil and the pushback that Mr. Greenberger has mentioned, his 
company saying, ``Oh, we're going to take our business 
elsewhere and it'll hurt your economy even more.'' I just 
wondered how you would respond to that.
    Mr. Soros. Yes. I think that it won't be quite as easy as 
Mr. Greenberger said to regulate the unregulated oil market, 
because the oil market is an international market, and trades 
take place all over the world. So, while it may be possible 
to--and I think the American institutions that are, let's say, 
now accumulating oil as an asset class, could be regulated, and 
they could be brought under regulation, and that would make a 
very big difference. I think other--actually, bringing hedge 
funds--many of them not domiciled in the United States, many of 
them not run by people in the United States--under the same 
kind of controls would be much more difficult.
    Senator Klobuchar. Thank you.
    Dr. Cooper. Senator, one observation.
    Senator Klobuchar. Dr. Cooper?
    Dr. Cooper. It would be infinitely easier to convince the 
American people to spend $40 a barrel to address the 
environmental and social costs of energy consumption if we 
weren't spending $80 a barrel on speculation and the abuse of 
market power. So, we really do have to keep these two things 
separate.
    Senator Klobuchar. Right.
    Dr. Cooper. I agree entirely that energy is--we really do 
have to recognize the social costs, but that doesn't mean we 
should pay the ransom that's being extracted from us now.
    Senator Klobuchar. Agreed.
    Senator Cantwell. Thank you.
    Senator Klobuchar. Thank you.
    Senator Cantwell. Thank you.
    Senator Nelson, last question.
    Senator Nelson. I agree about the ransom that we're paying, 
and you all have been wonderful in your presentation here to 
make it very clear about this speculation. But, at the end of 
the day, what we have to have is the political will to start 
weaning ourselves from dependence on oil and go to the 
alternatives. We had a wake-up call in the early 1970s. We went 
back to sleep. We had a wake-up call in the late 1970s. We went 
back to sleep. We had another wake-up call in the late 1980s, 
early 1990s, and we went back to sleep. Now, early in this 
decade we had another wake-up call that's still continuing, and 
the question is, are we going to go back to sleep?
    The bottom line--and this is my question--isn't it going to 
take the new President to say that we're going to have the 
equivalent of an Apollo program, and that we are going to break 
this dependence on, especially, foreign oil?
    Mr. Soros. I think, yes.
    Dr. Cooper. If you look at the cost of the climate change 
legislation before--being considered by the Senate as we 
speak--I added up the numbers, and it's almost $5 trillion over 
about 40 years. So, the Senate is now contemplating programs of 
an immense order of magnitude. We're going to wrangle about how 
the consumer's going to bear that cost. But, the Congress has 
finally begun to have this debate. All of the Presidential 
candidates have said they understand that there's a problem 
here. So, in fact, we may be--we may have wasted a long time, 
but, you know, the--all the evidence suggests that we're 
getting ready to grapple with this really difficult issue.
    Senator Nelson. I'll end on a good note, Madam Chair.
    You know, for each of the 8 years that you and I have been 
in the Senate, we have tried to increase miles per gallon, and 
we have always been defeated in the fleet average. We were 
operating on a standard that didn't mean anything, because it 
was 25 miles per gallon from 1980s, but light trucks and SUVs 
were exempt, so it didn't mean anything. Every year, we offered 
it, and we were beat. But, we finally won, a modest increase of 
only 35 miles per gallon phased over the next 12 years, to 
2020, but at least we succeeded with a modest increase. I hope 
that's a foretelling of things to come.
    Thank you.
    Senator Cantwell. Well, I thank Senator Nelson and all the 
members for attending hearing.
    And I certainly want to thank the panel and--for their 
testimony. Mr. Soros, Mr. Greenberger, Mr. Ramm, Ms. Watson, 
Dr. Cooper, thank you very much for being here.
    We will continue this discussion. I plan to continue to 
push the CFTC on their ``no action'' letter, and certainly on 
the FTC in getting an interim rule in place. But, we thank you 
for illuminating this issue for so many of us in the U.S. 
Senate, and certainly for our constituents.
    This hearing is adjourned.
    [Whereupon, at 12:17 p.m., the hearing was adjourned.]
                            A P P E N D I X

 Prepared Statement of Hon. Barbara Boxer, U.S. Senator from California
    As we head into the summer travel season, Americans are faced with 
rising unemployment rates, fallout from a widespread housing crisis and 
gas prices exceeding $4 per gallon.
    Californians are now paying more for our gas than any other state 
in the country, with the average price of a regular gallon of gasoline 
topping $4.40 per gallon.
    We know there are several factors contributing to the rise in oil 
prices and gas prices nationwide--increased demand for oil in growing 
economies such as China and India, conflict in oil producing regions 
that has had a destabilizing effect on the market, a weak dollar, and a 
failed energy policy on the part of our current Administration that has 
lacked the vision to invest in renewable energy and other alternatives.
    In addition to these factors, the high price of energy commodities 
has also contributed to high oil prices. I am greatly concerned about 
the impact of market speculation on the price of oil. In the past year, 
we have witnessed the price of oil nearly double and analysts now 
predict the price of a barrel of oil could reach $150 by the Fourth of 
July holiday.
    In Congress, I have joined with my colleagues to call on the 
President to cease filling the Strategic Petroleum Reserve and 
supported the inclusion of provisions in the Energy Independence 
Security Act (EISA) to give the Federal Trade Commission authority to 
prohibit market manipulation and the reporting of false information in 
wholesale petroleum markets.
    I also believe the Commodities Futures Trading Commission (CFTC) 
needs to be given the authority once again to regulate energy futures 
contracts to prevent the rampant trading that has driven the price of 
oil well beyond normal supply and demand costs.
    I look forward to working the Members of this Committee on this and 
other possible solutions to try to address the growing energy crisis.
    Thank you, Mr. Chairman.
                                 ______
                                 
        Prepared Statement IntercontinentalExchange, Inc. (ICE) 
                         and ICE Futures Europe
    IntercontinentalExchange, Inc. (ICE) and ICE Futures Europe are 
pleased to provide a statement in response to testimony provided at the 
June 3, 2008 Senate Hearing held by the Committee on Commerce Science 
and Transportation. ICE strives to demonstrate leadership in supporting 
efforts of both the U.S. Commodity Futures Trading Commission (CFTC) 
and Congress further enhancing market transparency. Over the past 
decade we have taken efforts to consciously build our marketplace on 
the cornerstones of integrity, transparency and neutrality. To do 
otherwise would be unworkable both from a customer acceptance and a 
regulatory perspective. ICE has been instrumental in developing a 
number of transparency initiatives from which the industry has 
benefited in the past several years. Today we operate a global 
marketplace that includes three fully regulated futures exchanges and a 
transparent over-the-counter (OTC) market, which will soon be regulated 
according to commodity trading provisions in the 2008 Farm Bill.
    As a member of the financial services community and a close 
observer of the global energy market, ICE would like to respond to 
certain misconceptions regarding our business and markets and issues 
related to this hearing. In particular, there has been significant 
interest in Congress with the ICE Futures Europe listing of its cash-
settled West Texas Intermediate (WTI) crude oil contract.
    ICE purchased the International Petroleum Exchange (IPE) in 2001. 
This has remained a U.K.-based exchange, now called ICE Futures Europe, 
and is fully regulated by the Financial Services Authority (FSA). The 
FSA has a wide range of rule-making, investigatory and enforcement 
powers and strives to meet four statutory objectives:

   maintaining confidence in the financial system;

   promoting public understanding of the financial system;

   securing the appropriate degree of protection for consumers; 
        and

   reducing the extent to which it is possible for a business 
        to be used for a purpose connected with financial crime.

    Since the WTI contract's inception, ICE has taken proactive 
measures to ensure that the FSA and CFTC, have had adequate data to 
monitor ICE's markets across borders. A primary focus of the FSA is on 
cooperating with overseas regulators, both to agree on international 
standards and to monitor global firms and markets effectively. In 2006 
the information sharing agreement between the CFTC and the FSA with 
regard to ICE's markets was re-examined and reaffirmed.
    This cooperation has now been enhanced through the information 
sharing agreement between the CFTC and the U.K. Financial Services 
Authority (FSA) that was announced on May 29, 2008. In modifying the 
existing memorandum of understanding between the CFTC and the FSA, ICE 
Futures Europe is the only oil futures exchange globally that reports 
information to both the CFTC and FSA. As a result of the agreement, ICE 
provides equal or greater disclosure for its markets than U.S.-based 
exchanges. Specifically, ICE has agreed to undertake, or develop the 
means to undertake, the following immediately:

        1. Provide daily large-trader positions to the CFTC in all U.S. 
        futures contracts, including the West Texas Intermediate (WTI) 
        crude oil contract;

        2. Extend the data currently provided to cover all contract 
        months;

        3. Provide trader information to ensure detailed identification 
        of market end-users;

        4. Provide data formatting so trading information can be 
        seamlessly integrated into the CFTC's existing surveillance 
        system; and

        5. In addition to the existing position management program that 
        FSA requires of ICE Futures Europe today, ICE Futures Europe 
        will monitor positions to detect those that exceed the same 
        accountability limits as employed by U.S. contract markets in 
        its U.S. products and to give timely notification to the CFTC 
        when that occurs.

    ICE Futures Europe has a well-established position monitoring 
regime that is rigorously enforced both at the exchange level and by 
the FSA. The FSA can and will require positions to be reduced if deemed 
necessary. Added to this, the market surveillance staff at ICE Futures 
Europe performs comprehensive monitoring in real-time across all of its 
markets and will notify the CFTC if speculative position accountability 
limits are exceeded in the WTI contract. In essence, all U.S. 
contracts, including WTI, offered in our markets are now monitored by 
two regulators.
    We would also like to highlight what we believe are some 
misperceptions about the products that actually trade on our exchange. 
The futures products traded at ICE Futures Europe and governed by the 
aforementioned regulatory regime include: Brent Crude oil, West Texas 
Intermediate (WTI) Crude oil, Gas Oil, Heating Oil and Emissions, as 
well as several other U.K. or Europe-specific gas and power offerings. 
It is important to make the distinction that ICE's OTC markets which 
were the subject of provisions in the 2008 Farm Bill have less than 1 
percent market share in both the physically-delivered OTC markets and 
in the cash-settled ``swaps'' market for coal, crude oil, U.S. 
gasoline, heating oil, and diesel fuel. Further, we maintain an 
approximately 25 percent market share for WTI Crude oil, with the 
majority of this volume coning from U.K.-based trading. The vast 
majority of WTI trading volume occurs on NYMEX. Importantly, the price 
of U.S. gasoline and heating oil is discovered on NYMEX, and not on our 
exchange, where our market share in these products is less than 1 
percent of total contract volume.
    While there has been significant focus recently on the price of oil 
and related products, it is important to note that prices for all 
commodities, such as corn, soybeans, precious metals and wheat, have 
surged at the same rate as crude oil, and in some cases more sharply 
and with greater volatility. It should be noted that in most of these 
commodity products, except in crude oil, where ICE and NYMEX have 
coexisted for more than 25 years, there are no major overseas markets 
offering commodity contracts to U.S. markets. These facts indicate that 
the existence of overseas markets cannot bear the blame when it comes 
to higher prices. While it is tempting to criticize the markets who 
deliver pricing signals, economists continue to agree that the primary 
driver of commodity prices across the board is a well-documented 
expansion in demand for the building blocks of emerging economies.
    Finally, we would like to point out that the issue of foreign 
boards of trade and the no-action process was fully and carefully 
evaluated by the CFTC at the end of 2006 and information sharing 
protocols were established to provide U.S. regulators with the very 
information certain Congressional representatives say they need to do 
their job. Both ICE and NYMEX operate liquid, transparent futures 
exchanges that serve the important function of price discovery for the 
world's oil markets. Onerous or selectively applied regulation could 
easily lead oil market participants to conduct their business off-
exchange in the opaque, voice-brokered markets. This would truly 
represent a shift to ``dark markets''.
                                 ______
                                 
 Joint Analysis Prepared by Majority and Minority Staffs of the Senate 
    Permanent Subcommittee on Investigations, Committee on Homeland 
 Security and Governmental Affairs of Michael Greenberger's Testimony 
  Before Senate Committee on Commerce, Science, and Transportation on 
                              June 3, 2008
                                                      June 24, 2008

    Because many questions have been directed to the Senate Permanent 
Subcommittee on Investigations (PSI) about the written and oral 
testimony of Michael Greenberger before the Senate Committee on 
Commerce, Science and Transportation on June 3, 2008, we have prepared 
this analysis of the major issues he raised involving: (1) the recently 
enacted law to close the ``Enron loophole,'' and (2) recent legislative 
proposals and administrative actions taken to strengthen U.S. oversight 
of futures contracts traded from within the United States on a foreign 
exchange.
    The identified statements are excerpted from Mr. Greenberger's oral 
testimony or, where a page number is provided, from his prepared 
statement.
Issues Related to Closing the Enron Loophole
    1. Statement: ``[The legislation to close the Enron loophole]. . 
.is the biggest joke in the world because it was written by the 
exchange that needs to be regulated.''
    Statement (p. 3): ``Virtually all parties now agree the Enron 
loophole must be repealed.''
    Response: The legislation to close the Enron loophole was written 
by the U.S. Congress, not the Intercontinental Exchange. Closing the 
Enron loophole has been the subject of repeated bills introduced on 
this subject since 2002. In the fall of 2007, following a PSI report 
and hearings on excessive speculation and the resulting move in 
Congress toward legislative reforms, the Commodity Futures Trading 
Commission (CFTC) and the President's Working Group (consisting of the 
Departments of Treasury, the Federal Reserve, the Securities and 
Exchange Commission, and the CFTC) submitted to Congress draft 
legislation to close the Enron loophole. That draft underwent 
significant revision during the legislative process, including numerous 
significant changes proposed by Senators Levin, Feinstein, Snowe, 
Coleman and others. The final language was the product of extensive 
bipartisan negotiations in both Houses of Congress and a conference 
committee led by the House and Senate Agriculture Committees. 
Throughout the legislative process ICE expressed numerous disagreements 
with many of the provisions in the various drafts of this legislation. 
The final legislation did not include many of the provisions that ICE 
had sought.
    The compromise legislation finally enacted into law as part of the 
Farm Bill enjoyed strong bipartisan support from Members in both Houses 
and from many energy, agricultural, consumer, and industrial 
organizations. \1\ We are unaware of any consensus to alter this 
legislation, which represents a bipartisan achievement after years of 
work.
---------------------------------------------------------------------------
    \1\ This legislation was supported by the American Public Gas 
Association, American Public Power Association, Consumer Federation of 
America, Environmental Defense, Industrial Energy Consumers of America, 
Independent Oil Marketers Association of New England, Mid-Atlantic 
Petroleum Distributor's Association, National Association of 
Convenience Stores, National Association of Truck Stop Operators, 
National Association of Wheat Growers, National Barley Growers 
Association, National Farmers Union, National Grange, National Rural 
Electrical Cooperative Association, New England Fuel Institute, Pacific 
Northwest Oilheat Council, Petroleum Marketers Association of America, 
Petroleum Transportation and Storage Association, Public Citizen, 
Society of Independent Gasoline Marketers of America, Steel 
Manufacturers Association, and Western Petroleum Marketers Association.

    2. Statement: ``The End the Enron Loophole, because it was written 
by the Intercontinental Exchange, handed to the CFTC and then handed to 
Congress, does not deal with crude oil.''
    Statement (p. 4): ``Thus, by CFTC pronouncement, crude oil, 
gasoline and heating oil futures will not be covered by the new 
legislation.''
    Response: These statements are incorrect or may leave an incorrect 
impression. The law enacted by Congress to close the Enron loophole 
regulates the electronic trading of all types of energy and metal 
commodities on Exempt Commercial Markets without exception, including 
crude oil, gasoline, and heating oil, if the relevant contracts perform 
a significant price discovery function. The CFTC has not made any 
statements or decisions to exempt any class of commodities or energy 
contracts from CFTC oversight under the new law. At the same time, as a 
practical matter, the new law will not affect current trading of U.S. 
crude oil, gasoline, and heating oil futures contracts--not because of 
who drafted the law or because of any gaps in the legislation--but 
because futures contracts in those commodities are not currently being 
traded on U.S. Exempt Commercial Markets. Rather, futures contracts in 
these commodities are being traded on futures exchanges in the United 
States and United Kingdom. Should any of those energy commodities ever 
be traded on Exempt Commercial Markets, the new law makes it clear that 
the CFTC will be able to exercise oversight over them. As a result of 
the legislation to close the Enron loophole, traders will no longer 
have the opportunity to trade crude oil, gasoline, or home heating oil 
on U.S. electronic markets without CFTC oversight.

    3. Statement (p. 4): ``. . . the Farm Bill amendment requires the 
CFTC and the public to prove on a case-by-case basis through lengthy 
administrative proceedings that an individual energy contract should be 
regulated if the CFTC can prove that contract `serve[s] a significant 
price discovery function' in order to detect and prevent 
manipulation.''
    Statement: ``[The legislation to close the Enron loophole] puts 
1,000 burdens on the CFTC and the public to prove that there needs to 
be regulation.''
    Statement: ``[The CFTC] has to go through complicated 
administrative hearings, which I can tell you will be challenged 
vigorously by people who can afford to make those challenges, and will 
have to prove by substantial evidence that that contract will be 
regulated.''
    Statement (p. 4): ``It will doubtless be followed by lengthy and 
costly judicial challenges during which the CFTC and energy consuming 
public will be required to show that its difficult burden has not been 
met.''
    Response: These statements are incorrect. The new law does not 
place any burden on the public, does not require extensive 
administrative proceedings to determine that a contract performs a 
significant price discovery function and is subject to CFTC oversight, 
and does not authorize judicial challenges to CFTC decisions in this 
area. To the contrary, the law explicitly gives the CFTC the 
``discretion'' to determine which contracts perform significant price 
discovery functions and are subject to CFTC oversight. The statute and 
legislative history make it clear that formal administrative 
proceedings are not required and judicial challenges are not permitted. 
For example, during the Senate's consideration of the legislation, 
Senator Levin explained:

        The legislation also states clearly that a CFTC determination 
        that a contract performs a significant price discovery function 
        is a determination that is within the Commission's discretion; 
        this determination is not intended to be subject to formal 
        challenge through administrative proceedings.''

        The Statement of Managers in the Conference Report states:

        ``The Managers do not intend that the Commission conduct an 
        exhaustive annual examination of every contract traded on an 
        electronic trading facility pursuant to the section 2(h)(3) 
        exemption, but instead to concentrate on those contracts that 
        are most likely to meet the criteria for performing a 
        significant price discovery function.

    The law directs the CFTC to determine which contracts are 
performing significant price discovery functions within 180 days of 
promulgating regulations setting forth the criteria to be considered 
when evaluating individual contracts.

    4. Statement: ``The CFTC has said that farm bill amendment [sic] 
will affect one out of thousands of energy contracts.''
    Statement (p. 4): ``This contract-by-contract process will take 
months, if not years, to complete and it will then only apply to a 
single contract.''
    Response: These statements are incorrect. The CFTC has not made any 
statements or provided any indication of the number of commodities or 
contracts that will likely be determined to perform a significant price 
discovery function. The CFTC certainly has not indicated that only one 
contract will be covered. To the contrary, informed observers indicate 
multiple contracts are likely to qualify for CFTC oversight.

    5. Statement (p. 4): ``Moreover, the Farm Bill's attempt to end the 
Enron Loophole will doubtless lead to further regulatory arbitrage. If 
the CFTC should be able to prove that an individual energy futures 
contract has contract has [sic] a `significant price discovery 
function,' and thus should be subject to regulation, traders will 
almost certainly simply move their trading to equivalent contracts that 
remain exempt from regulation.''
    Response: Mr. Greenberger appears to be predicting that if the CFTC 
determines that one particular contract performs a significant price 
discovery function, then traders will begin trading a different 
contract that hasn't been deemed to perform a significant price 
discovery function and isn't subject to CFTC oversight. Practical 
obstacles and the design of the new law, however, make this type of 
maneuvering unlikely.
    First, it is much more difficult for a trader to use a contract 
that does not perform a price discovery function since, by definition, 
it will have a lower trading volume and fewer counterparties. During 
the PSI Amaranth investigation, numerous traders told the Subcommittee 
that the most significant factors in determining which market and 
contract to use for trading were price and liquidity. All of the 
traders interviewed by the Subcommittee stated that they would trade 
the contract that provided the best price and most liquidity, 
regardless of whether it was in a regulated or unregulated market. 
Second, if a significant amount of trading did migrate from a regulated 
contract to an unregulated contract simply to avoid regulation, the 
CFTC could readily determine that the second contract also performed a 
significant price discovery function and regain its ability to exercise 
oversight. In fact, one of the statutory factors for determining 
whether a contract performs a significant price discovery function is 
whether that contract is being used for arbitraging purposes. The new 
law thus contains provisions designed to prevent exactly the type of 
arbitrage scenario Mr. Greenberger describes.

    6. Statement: ``I would go back to the status quo ante before the 
Enron loophole was passed.''
    Statement (p. 5): ``Again, the easiest course to end the Enron 
loophole was not chosen as part of the Farm Bill. The most effective 
closure would have simply returned the Commodity Exchange Act to the 
status quo ante prior to the passage of the Enron loophole.''
    Statement (p. 3): ``The simplest way to repeal [the Enron loophole] 
would be to add two words to the Act's definition of `exempt commodity' 
so it reads: an exempt commodity does `not include an agriculture or 
energy commodity;' and two words to 7 U.S.C.  7(e) to make clear that 
`agricultural and energy commodities must trade on regulated markets.' 
''
    Response: Mr. Greenberger seems to be proposing a return to the 
legal framework for commodity trading prior to enactment of the 
Commodity Futures Modernization Act (CFMA) of 2000, and to require 
energy and metal commodities to be traded in the same way as 
agricultural commodities, which means they could not be traded on 
electronic exchanges other than a futures exchange. This approach would 
prohibit energy traders from trading financially settled swap 
instruments on electronic exchanges that are not futures exchanges, 
even though under the legislation the trading of significant price 
discovery contracts on these electronic exchanges will be regulated 
just like futures contracts. At the same time, the proposal would 
continue to permit those traders to trade these swap instruments 
amongst themselves by unregulated non-electronic means, such as through 
voice brokers, large financial institutions that operate as swap 
``dealers,'' and directly between each other using telephones and fax 
machines.
    One of the problems with this approach is that it would re-direct 
trading from electronic exchanges that promote price transparency and 
cleared trades, two mechanisms that increase market efficiency and 
stability, toward greater use of unregulated, non-transparent, and non-
cleared trading of swaps that impair price transparency, increase 
systemic risk, and make it harder to detect and prevent manipulation. 
It is partly because financially settled swaps do not require the 
physical delivery of a commodity, and partly because of the historic 
inability of the futures exchanges to develop active markets for more 
specialized types of financial and energy swaps, that Congress has 
never required them to be traded on fully regulated futures exchanges. 
To do so now would constitute a major change in U.S. commodity law, and 
would go much further than the status quo ante prior to the CFMA. In 
addition, eliminating electronic exchanges open to large traders would 
dismantle an accepted commodity market mechanism--the significant 
portions of which are now regulated--for little apparent regulatory 
gain.

    7. Statement: ``Prior to the [Enron loophole], every futures 
contract--oil, collateralized debt obligations, credit default swaps--
had to be traded pursuant to regulation that had age-old and time-
tested controls on speculation.''
    Response: This statement is incorrect. Prior to the Commodity 
Futures Modernization Act (CFMA), large traders trading financial 
instruments like collateralized debt obligations, credit default swaps, 
and energy swaps were eligible for the hybrid and swaps exemption from 
the requirement that all futures contracts be traded on a regulated 
futures exchange. See, e.g., 17 C.F.R. Part 35 (Exemption of Swap 
Agreements). Persons trading swaps under the various preCFMA swaps 
exemptions were not subject to speculative position limits.

    8. Statement: ``Overnight, [prohibiting the trading of energy 
commodities in Exempt Commercial Markets] will bring down the price of 
crude oil, I believe, by 25 percent.''
    Response: According to recent market data, there is little to no 
trading of crude oil contracts on exempt commercial markets in the 
United States. Prohibiting the trading of energy commodities in a 
market in which no trading is currently taking place is, thus, unlikely 
to have an effect on the price of crude oil. Moreover, although there 
have never been any Exempt Commercial Markets for agricultural 
commodities, many agricultural commodities have recently experienced 
substantial price spikes. There is no credible evidence that simply 
amending the CEA to regulate energy commodities as if they were 
agricultural commodities will lead to lower energy prices.
Issues Related to Closing the London Loophole
    9. Statement: ``[B]ecause of that Enron loophole, which I believe 
has not been closed for crude oil, there are no speculation limits in 
these markets that are unregulated.''
    Response: The Enron loophole has been closed for all energy and 
metal commodities, including crude oil traded on Exempt Commercial 
Markets in the United States. But currently, crude oil is not being 
traded on those markets.
    Crude oil is instead being traded on the NYMEX exchange in New 
York, which has speculative position limits, and on the ICE Futures 
Europe exchange in London, which does not. The ICE Futures Europe 
exchange in London has no speculative position limits, because until 
recently neither the British Financial Services Authority (FSA) nor ICE 
Futures Europe had imposed them for U.S. crude oil contracts traded on 
that exchange.
    Since 1982, Section 4 of the Commodity Exchange Act has authorized 
U.S. persons to trade on foreign exchanges and has prohibited the CFTC 
from imposing regulatory requirements upon those foreign exchanges. 
Recently, this CEA exemption has been referred to as the London 
loophole, since it allows U.S. traders to trade on the ICE exchange in 
London without CFTC oversight and without speculative position limits. 
On June 16, 2008, in response to concerns expressed about the London 
loophole, the CFTC announced that ICE Futures Europe would have to 
implement speculative position limits in order to be able to continue 
to offer U.S. traders the option of trading its U.S. crude oil contract 
through U.S.-based trading terminals. The CFTC is also working with the 
FSA on an agreement to impose speculative position limits on this 
contract and to alert the CFTC when any trader has exceeded those 
limits.

    10. Statement: ``There is now nothing in the law that sanctions 
foreign board of trades in the United States trading U.S. products 
being able to escape regulation. . . . What is now in my belief, 
illegal, and will soon, if somebody wakes up, be invalidated by either 
a private individual being hurt by it or a state attorney general.''
    Statement (p. 5): ``These staff no action letters have been 
referred to as Foreign Board of Trade exemptions (FBOTs)--a term which 
as of today is nowhere found in the CEA.''
    Statement (p. 12): ``[T]here is no statute to date that provides 
any exemption for U.S. trading on Foreign Boards of Trade. The 
Commodity Exchange Act says nothing about Foreign Boards of Trade.''
    Response: These statements are incorrect. The Commodity Exchange 
Act (CEA) explicitly excludes trading on a foreign board of trade from 
key CFTC regulations. Section 4(a) of the CEA explicitly exempts from 
the requirement that all futures contracts be traded on a CFTC-
regulated futures exchange contracts traded on or subject to the rules 
of any board of trade or exchange ``located outside the United 
States.'' Section 4(b) prohibits the CFTC from issuing any regulation 
that approves or ``governs in any way any rule or contract, rule, 
regulation, or action of any foreign board of trade.''

    11. Statement (p. 5): ``It has been a fundamental tenet, recognized 
by exchanges all over the world, that if the trading of futures 
contracts takes place within the United States, that trading, unless 
otherwise exempted or excluded by the Act itself or by the CFTC through 
an exemption granted pursuant to the Futures Trading Practices Act of 
1992 (otherwise referred to as section 4(c)) ,is subject to the 
regulatory jurisdiction of the Commodity Futures Trading Commission. 
Recognition of that sweeping reach of U.S. jurisdiction is evidenced by 
the fact that most major foreign futures exchanges have asked the CFTC 
for an exemption from the full regulatory requirements of the Commodity 
Exchange Act (CEA) to which they might otherwise be subject in order to 
allow those foreign entities to conduct trading in the U.S. on U.S.-
based terminals of foreign delivered futures contracts. That exemption, 
premised on section 4(c), has been issued to many foreign exchanges 
through staff no action letters, which permit trading on a foreign 
exchange's U.S.-based terminals without that exchange being subject to 
U.S. statutory or regulatory requirements.''
    Response: These statements mischaracterize the statutory and legal 
basis for the CFTC's determination to permit foreign exchanges to 
operate trading terminals in the United States without being subject to 
full CFTC regulation as a futures exchange. The basis for the CFTC's 
determination to grant a foreign board of trade or exchange permission 
to operate trading terminals in the U.S. without being subject to the 
full regulatory requirements applicable to U.S. futures exchanges is 
not Section 4(c) of the CEA or Futures Trading Practices Act, but 
rather CEA Section 4(a). Section 4(a) provides that all futures 
contracts traded in the United States must be traded on a regulated 
exchange other than contracts traded on or subject to the rules of a 
board of trade or exchange located outside the United States. 7 U.S.C. 
 6(a). Futures contracts traded from within the United States on a 
foreign exchange are, thus, excluded by statute from the requirement 
that futures contracts traded in the United States be traded on a 
futures exchange regulated by the CFTC.

    12. Statement (p. 6): ``This exemption was entirely the creation of 
CFTC staff and it has never been formally approved by the Commission 
itself.''
    Response: This statement is incorrect. The decision to allow 
foreign exchanges to establish trading terminals in the United States 
and to permit trading on those terminals outside of CFTC oversight was 
formally approved by the CFTC in a Policy Statement issued on November 
2, 2006. The 2006 Policy Statement was issued after a process in which 
the CFTC sought public comment, received written comment letters, and 
held a public hearing on the issues raised. In the Policy Statement, 
the CFTC wrote:

        ``The Commodity Futures Trading Commission is issuing a 
        Statement of Policy that affirms the use of the no-action 
        process to permit foreign boards of trade to provide direct 
        access to their electronic trading systems to U.S. members or 
        authorized participants, and provides additional guidance and 
        procedural enhancements.'' \2\
---------------------------------------------------------------------------
    \2\ Commodity Futures Trading Commission, Policy Statement, Boards 
of Trade Located Outside of the United States and No-Action Relief From 
the Requirement To Become a Designated Contract Market or Derivatives 
Transaction Execution Facility, 71 Fed. Reg. 64443 (Nov. 2, 2006).

    13. Statement (p. 6): ``The staff FBOT no action letter process 
never contemplated that an exchange owned by or affiliated with a U.S. 
entity would escape the CFTC regulation imposed on traditional U.S. 
exchanges.''
    Response: This statement is incorrect. In its 2006 Policy 
Statement, the CFTC determined it would not be appropriate to use any 
``bright-line'' test based on the location of an affiliate or related 
corporate entity to determine whether to treat an entity as a U.S. or 
foreign exchange. Instead, the CFTC adopted a flexible approach that 
considered the totality of circumstances for determining whether an 
exchange was foreign or domestic, including whether the exchange was 
affiliated with a U.S. exchange. This approach was favored by most of 
the comments received by the Commission on this issue.

    14. Statement (p. 3): ``For purposes of facilitating exempt natural 
gas futures, ICE is deemed a U.S. `exempt commercial market' under the 
Enron loophole. For purposes of its facilitating U.S. WTI crude oil 
futures, the CFTC, by informal staff action, deems ICE to be a U.K. 
entity not subject to direct CFTC regulation even though ICE maintains 
U.S. headquarters and trading infrastructure, facilitating, inter alia, 
at 30 percent of trades in U.S. WTI futures.''
    Response: The statement gives the inaccurate impression that a 
single legal entity named ``ICE'' operates two exchanges, one in the 
United States and one in London, and is being treated differently 
depending upon which exchange is at issue. In fact, the legal entities 
that operate these two exchanges are different.
    The legal entity that operates the electronic exchange within the 
United States is the Intercontinental Exchange (``ICE''). ICE is a 
Delaware corporation located in Atlanta, Georgia. ICE pays U.S. taxes, 
uses U.S. employees, and operates an exempt commercial market in the 
United States that, among other commodities, trades natural gas 
contracts.
    ICE has several wholly-owned subsidiaries that operate regulated 
futures exchanges--ICE Futures US, ICE Futures Canada, and ICE Futures 
Europe. Each subsidiary has its own management and an independent board 
of directors. Each exchange is overseen by the regulatory authority of 
the country in which the exchange is physically located. The regulatory 
authority oversees the exchange and the subsidiary that operates the 
exchange, but not the parent corporation, ICE.
    ICE Futures Europe operates an exchange in London and, on it, 
trades European crude oil (Brent crude oil from the North Sea), 
European heating oil, European natural gas, and other European 
contracts as well as a financially-settled U.S. crude oil futures 
contract (based on the price of West Texas Intermediate crude oil 
contracts traded in New York), U.S. gasoline, and U.S. home heating oil 
contracts. ICE Futures Europe is registered in the United Kingdom, pays 
U.K. taxes, has U.K. employees, is treated as a U.K. corporation, and 
is regulated by the U.K. Financial Services Authority.
    The CFTC has not deemed the parent corporation ICE to be a U.K. 
entity; it treats ICE as a U.S. corporation, which it is. ICE Futures 
Europe, on the other hand, is a U.K. corporation, not because the CFTC 
has ``deemed it to be'' a U.K. entity, but by operation of U.K. law. 
Moreover, under U.K. law, the parent corporation, ICE, is not permitted 
to direct the activities of its subsidiary, ICE Futures Europe, in 
operating the London exchange. The CFTC thus treats ICE Futures Europe 
as a foreign board of trade, because ICE Futures Europe is, in fact, a 
foreign board of trade.

    15. Statement (p. 3): ``[T]he statute should also be amended to 
forbid an exchange from being deemed an unregulated foreign entity if 
its trading affiliate or trading infrastructure is in the U.S.; or if 
it trades a U.S. delivered contract within the U.S. that significantly 
affects price discovery.''
    Response: The 2006 Policy Statement issued by the CFTC discusses 
the various criteria for determining when a foreign board of trade 
should be permitted to operate within the United States and not be 
subject to full CFTC regulation as a domestic futures exchange. The 
CFTC invited and considered public comments on all of the criteria 
urged by Mr. Greenberger. The Policy Statement states that the 
Commission ``decided not to adopt any objective standards establishing 
a threshold test of U.S. location. Commission staff will continue to 
assess the legitimacy of any particular applicant to seek relief as a 
`foreign' board of trade by considering the totality of factors 
presented by an applicant. This flexible case-by-case approach will 
permit staff, during a period of evolving market structure, to consider 
the unique combination of factual indicators of U.S. presence that may 
be presented by an applicant for relief.''

    16. Statement (p. 5): ``[T]he Dubai Mercantile Exchange, in 
affiliation with NYMEX, a U.S. exchange, has also commenced trading the 
U.S. delivered WTI contract on U.S. terminals, but is, by virtue of a 
CFTC no action letter, regulated by the Dubai Financial Service 
Authority.''
    Response: This statement is incorrect. The Dubai Mercantile 
Exchange (DME) has not commenced trading crude oil contracts in the 
United States, although it has announced its intention to seek 
permission to establish DME trading terminals in the United States to 
trade this contract. Second, the DME is not considering trading a ``U. 
S. delivered WTI contract,'' but rather a financially settled 
derivative contract whose price would be linked to the settlement price 
of the WTI contract traded on the NYMEX. The Dubai WTI-related contract 
would not require the physical delivery of any crude oil. Third, the 
trading of contracts on the DME will be regulated by the Dubai 
Financial Services Authority, not by virtue of any action or inaction 
by the CFTC, but rather by the operation of the law of Dubai, the 
jurisdiction in which the DME is located.
    The issue is not whether the DME will regulate trading on an 
exchange located in its country, but whether the CFTC will be able to 
exercise oversight of DME contracts traded here in the United States. 
The CFTC has yet to grant DME permission to use trading terminals in 
the United States for the trading of its WTI contract and, prior to 
doing so, may follow the precedent set in the United Kingdom and 
require DME to provide daily trading data and apply speculative 
position limits to those contracts comparable to the reporting and 
trading requirements applicable to WTI-related contracts currently 
traded in the United States. Legislation has been introduced in the 
Senate, S. 2995 and S. 3129, that would require the CFTC to follow that 
course of action for every foreign exchange seeking to trade within the 
United States.

    17. Statement (p. 12): ``S. 2995 . . . opens the door to any 
foreign exchange operating under an FBOT exemption escaping U.S. 
regulation for any U.S. delivered commodity. . . .''
    Response: This statement is incorrect. S. 2995 was introduced by 
Senators Levin and Feinstein in May. In June, a new provision was added 
to the bill and it was reintroduced as S. 3129, the Close the London 
Loophole Act sponsored by Senators Levin, Feinstein, Durbin, Dorgan, 
and Bingaman. There is nothing in either S. 2995 or S. 3129 that would 
``open the door'' to any foreign board of trade ``escaping U.S. 
regulation.'' To the contrary, both bills would make it more difficult 
for the CFTC to grant a no-action letter to a foreign exchange than 
under current CFTC practice. Both bills would require the CFTC, before 
granting or continuing permission for a foreign exchange to operate 
trading terminals within the United States, to make a specific finding 
that the foreign exchange has comparable transparency requirements and 
speculative positions limits to those in the United States. S. 3129 
goes further and gives the CFTC explicit authority to: (1) prosecute 
U.S. persons who manipulate or attempt to manipulate the price of a 
commodity in interstate commerce through trading on a foreign exchange; 
(2) direct U.S. traders to reduce their positions on a foreign exchange 
when those positions exceed the applicable position limits or 
accountability levels; and (3) impose recordkeeping requirements on 
U.S. traders trading on a foreign board of trade or exchange. Both 
bills would strengthen U.S. oversight of foreign exchanges operating 
trading terminals in the United States.

    18. Statement (p. 13): ``S. 2995 does not incorporate all of the 
conditions within the present FBOT no action letter typically issued by 
CFTC staff.''
    Response: S. 2995 and its successor bill S. 3129 do not limit the 
conditions that the CFTC may impose upon a foreign exchange in a no-
action letter; both bills simply require that certain conditions be met 
before a foreign exchange is allowed to operate trading terminals 
within the United States. Nothing in either bill would restrict the 
conditions the CFTC may impose upon a foreign exchange to those 
specified in the bill language.

    19. Statement (p. 8): ``The Senate Permanent Investigating 
Subcommittee has now issued two reports, one in June 2006 and one in 
June 2007, that make a very strong (if not irrefutable case) that 
trading on ICE has been used to manipulate or excessively speculate in 
U.S. delivered crude oil and natural gas contracts. The June 2006 
report cited economists who then concluded that when a barrel of crude 
was at $77 in June 2006, $20 to $30 dollars of that cost was due to 
excessive speculation and/or manipulation on unregulated exchanges.''
    Response: The 2006 and 2007 PSI reports focused on the role of 
excessive speculation in U.S. commodity markets; neither report 
contained any findings on whether traders manipulated crude oil or 
natural gas prices.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Thomas R. Carper to 
                          Michael Greenberger
    Question 1. Mr. Cooper stated in his testimony that Americans are 
paying $1,500 more per year on gas due to high costs. Do people in some 
areas in the country feel the pain of high gas prices more than others? 
If so, why?
    Answer. It is my understanding that those portions of the country 
that do not have reliable and affordable mass transits are feeling the 
pains of gas prices higher than in those jurisdictions where American 
can substitute public for personal automobile transportations. For 
example, you hear that rural areas have been hit much harder than urban 
areas that have mass transit infrastructure.

    Question 2. In Mr. Soros' testimony, he stated that only a 
recession is likely to reduce consumption enough to bring down gas 
prices. This reminded me of several articles I have read recently 
regarding Americans' increasing use of transit and makes me curious 
about its impact on demand. Just this morning, it was reported that 
transit ridership is up by double digit percentages. Transit in the 
Wilmington area has seen the 6th largest jump of any commuter rail in 
the nation. However, many transit authorities are having trouble 
accommodating the increased demand, and most communities have little in 
the way of comprehensive, reliable transit. My question is: if reliable 
transit was available in all or most communities, what would the impact 
on oil prices be? Could this help Americans reduce demand enough to 
reduce gas prices without a recession?
    Answer. Although those of us who have testified that uncontrolled 
and excessive speculation has placed unnecessary premiums on American 
energy consumers, we have also emphasized that supply and demand 
fundamentals play a role in skyrocketing crude oil prices. If reliable 
mass transit were available in all or most communities then that would 
undoubtedly ease supply/demand concerns and, in turn, reduce crude oil 
prices. As I understand it, Mr. Soros' testimony concerning a harsh 
recession, was directed toward the deflating of what he sees as a 
classic speculative ``bubble.'' It is my view that the need for a 
recession can be avoided by developing alternative sources of energy 
and by time-tested regulatory principles that quickly deflates the 
speculative premiums now being paid by American consumers. In sum, this 
problem can be fixed short of Americans experiencing the kind of 
debilitating recession that Mr. Soros described.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                          Michael Greenberger
    Question 1. Given your history as a former employee of the CFTC, 
how do you see the FERC, FTC and CFTC working together with this new 
authority? Should there be a working relationship between these 
agencies?
    Answer. Yes, these agencies should establish and maintain a close 
real time working relationship in order to maximize their potential for 
effectively overseeing the entirety of the natural gas and crude oil 
markets. In the natural gas market, for example, FERC had substantial 
experience overseeing the physical supply and CFTC had the expertise to 
understand the futures markets in that commodity. The combination of 
the Energy Policy Act of 2005 and the Commodity Exchange Act has 
allowed both agencies to work together in order to monitor the 
relationship between the futures and physical natural gas markets. By 
virtue of the Energy Policy Act of 2005, FERC now has jurisdiction over 
the natural gas futures market to prevent the distortion of the 
physical markets by the futures markets. Because of the 2005 
legislation, the jurisdiction of the two agencies substantially 
overlaps on the futures side. While some have viewed this as 
unnecessary, the two agencies working together--placing a premium on 
protecting natural gas consumers rather than each agencies' individual 
interests--has maximized the potential for effectively overseeing the 
natural gas market as whole.
    Under the Energy Independence and Security Act of 2007, Congress 
included a provision expanding the power of the Federal Trade 
Commission to combat price manipulation with respect to crude oil 
futures markets in the same way it expanded FERC jurisdiction into the 
natural gas futures markets in 2005. If the FTC and the CFTC coordinate 
to drain excessive speculation and other unlawful activities from the 
crude oil market as a whole, they would allow market fundamentals, 
rather than excessive speculation, to dictate the crude oil price. 
Again, the first step, however, is a coordinated investigation into 
opaque futures markets to determine whether excessive speculation or 
other malpractices exist. A real time cooperative and coordinated 
effort in examining the physical and futures crude oil markets is 
imperative to determine if dysfunction exist and then to remedy them if 
the investigation determines that the markets are unhinged from supply/
demand factors.

    Question 1a. Do you believe that the budgets for these agencies are 
commensurate to the outlined critical task of policing our energy 
markets?
    Answer. I am favor of increasing all three agencies' budgets (CFTC, 
FERC, and the FTC) to meet their statutory responsibilities to police 
these energy markets. However, I also believe that in this time of 
extreme crisis, these agencies have the authority and the ability to 
organize themselves effectively to meet the objectives Congress has 
imposed. In my opinion, relatively small interagency or intra-agency 
task forces with competent and experienced leadership can satisfy all 
regulatory responsibilities imposed on these agencies with later 
supplemental funding serving as undergirding for investigative efforts 
that should begin immediately. In sum, I support reasonable increases 
in each of these agencies' budgets. I am optimistic that each of these 
agencies is capable of reaching congressional benchmarks promptly with 
effective leadership and organization. As a former CFTC regulator, I 
have seen what small well led investigative teams can do. All three 
agencies collectively and individually should begin these efforts 
immediately with Congress ultimately providing additional resources to 
see these investigations to their conclusions. Moreover, given the 
number of inter-Executive Branch task forces that have been convened, 
additional personnel should be assigned by the Executive Branch to 
these three agencies on a temporary basis while these investigations 
begin.

    Question 2. Could you help explain why there is a reverse 
correlation on this chart between the rising WTI settlement price and 
the decreased volume and open interest market share of trading on ICE?
    Answer. The chart does not provide enough information to determine 
ICE's WTI futures trading volume relative to the market's total volume. 
As I understand it, ICE trades WTI futures contracts both on under its 
``ICE Futures Europe'' banner, as well as on ICE OTC. Does the chart 
reflect only ICE Futures Europe or all ICE WTI trading? Without more 
information regarding the volume of trading in these other markets, I 
cannot fully assess the importance of the reverse correlation between 
the settlement price and ICE's trading volume and market share.
    In any event, even if the chart reflects all ICE trading, whether 
on ``Futures Europe'' and ICE OTC, it reflects about a 7 percent 
downturn in ICE's share of the market, leaving ICE at 26 percent of the 
WTI futures market. That percentage would still in excess of the 
trading outside the direct supervision of the CFTC to lead to a run up 
in crude oil prices that bear no relationship to market fundamentals. 
Of course, this is aggravated by the fact that risk laid off by the 
energy index funds keeps mounting and those positions on NYMEX are not 
subject to that exchanges speculation limits. We have seen in recent 
weeks, major announcements from China about their plan to eliminate oil 
subsidies and the Saudis' promise to increase substantially daily 
output, yet the price of oil has continued to rise. This strongly 
suggests that the price of oil has become unhinged from the 
fundamentals of supply and demand and is being driven by some other 
market element. Again, the only way in which the true cause of the 
crude oil spike can be determined is for a full and careful examination 
of these markets by U.S. regulators looking to all trading taking place 
on U.S. trading facilities of the U.S. delivered West Texas 
Intermediate futures contract. That kind of investigation would settle 
once and for all what is behind the spike that seems to be unresponsive 
to increased supplies.

    Question 3. Do you believe Mr. Master' underlying assumptions are 
correct about the market place? Are index speculators artificially 
driving the price of oil up to levels beyond supply and demand? Do you 
agree with Mr. Masters' prescriptions to the systems failure?
    Answer. Mr. Masters has convincingly demonstrated that large 
financial institutions are ``hedging'' their off exchange futures 
transactions on U.S. regulated commodities futures exchanges, are being 
deemed by NYMEX (a regulated exchange) and the CFTC, as ``commercial 
interests,'' rather than as the speculators subject to NYMEX 
speculation limits. By treating large financial institutions in this 
circumstance in the same manner as traditional physical hedgers,\1\ 
even fully regulated U.S. exchanges are not applying traditional and 
time tested speculation limits to the transactions engaged in by what 
are commonly thought of as speculative interests. In sum, Mr. Masters 
analysis further explains additional and powerful factors that may very 
well be separating the WTI crude oil markets from economic fundamentals 
and his evidence needs to be fully evaluated and, if corroborated by 
the U.S. government, responded to with application of all of the 
emergency powers afforded the CFTC under Section 8a (9) of the 
Commodity Exchange Act, including temporary adjustments of margins and 
speculation limits by that agency and, if necessary, contract 
moratoria.
---------------------------------------------------------------------------
    \1\ Gene Epstein, Commodities: Who's Behind The Boom?, Barron's 32 
(March 31, 2008) ( ``The speculators, now so bullish, are mainly the 
index funds. . . . By using the [swaps dealers] as a conduit, the index 
funds get an exemption from position limits that are normally imposed 
on any other speculator, including the $1 in every $10 of index-fund 
money that does not go through the swaps dealers.'')
---------------------------------------------------------------------------
                                 ______
                                 
  Response to Written Question Submitted by Hon. Olympia J. Snowe to 
                               Gerry Ramm
    Question. Two weeks ago before the Homeland Security and Government 
Affairs Committee, Mr. Michael Masters, Managing Member of Master 
Capital Management indicated that commodity index trading has risen 
from $13 billion at the end of 2003 to $260 billion as of March 2008 
and indicated that institutional investors are contributing to the rise 
in prices. Mr. Masters then proceeded to outline three actions that 
could reverse this trend. These included: (1) Restricting pension funds 
from using commodities futures markets; (2) Provide transparency in the 
over-the-counter markets; and (3) Delineate the classification of 
position in the commercial category of reports to indicate the position 
of banks as well as the physical hedgers. Do you believe Mr. Masters' 
underlying assumptions are correct about the market place? Are index 
speculators artificially driving the price of oil up to levels beyond 
supply and demand? Do you agree with Mr. Masters prescriptions to the 
systems failure?
    Answer. Yes. Mr. Masters' testimony outlines the need to reform 
futures markets by reducing the impact of institutional investment on 
commodity markets. Commodity futures exchanges were predominately 
created for oil producers and consumers to offset price risk by 
entering into a futures contract for future delivery. Over the years, 
PMAA members have seen a disconnect between commodity prices and supply 
and demand fundamentals. For instance, Colonial Pipeline had 150,000 
barrels of surplus heating oil available for auction on May 7. On that 
same day heating oil futures on the NYMEX settled at another record-
high with its June contract closed with a 9.3ct gain at $3.38/gal with 
New England temperatures averaging in the high 70s. PMAA have lost 
faith in the ability to hedge for the benefit of their customers.
    Over the last few years, pension funds and endowment funds, etc. 
use commodity markets as a way to diversify their portfolios and as a 
hedge against inflation. Currently, the institutional investment ``buy 
and hold'' strategy has caused an inflated crude oil price because 
index speculators do not trade based on the underlying supply and 
demand fundamentals of the individual physical commodities. When 
institutional investors buy an initial futures contract, that demand 
drives up the price. As the contract approaches the delivery month, 
institutional investors roll the expiring contract into the next 
delivery month while never taking possession of the physical commodity. 
This ``buy and hold'' strategy distorts the futures markets price 
discovery function. For instance, a buy order from a heating fuel 
dealer locking in a price for future delivery will have the exact same 
price impact as a buy order from an institutional investor.
    I agree with Mr. Masters prescriptions for a commodity futures 
systems failure. Institutional investors are not traditional 
speculators who profit when prices go up or down. Institutional 
investor's ``buy and hold'' strategy only profit when prices continue 
to rise which can have serious consequences. Because the speculation 
bubble might soon burst, pension funds and endowment funds will likely 
suffer the greatest losses because they are notoriously slow to react 
to quickly changing market conditions. When the market corrects, hedge 
funds will quickly reduce holdings and cut their losses.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                             Lee Ann Watson
    Question 1. Ms. Watson, following our hearing regarding the FTC 
Reauthorization last month, I was deeply concerned about the lack of 
urgency from the FTC about implementing Title 8, Subtitle B of the 
Energy Independence and Security Act. At a time when the rise in energy 
prices has effectively wiped out the economic stimulus checks, we need 
to move expeditiously with this new authority to ensure that these 
markets are not being manipulated. Senators Cantwell, Smith, Dorgan, 
and Inouye sent a letter to the FTC asking that they move forward with 
a rulemaking by the end of the year. For many consumers, truckers, and 
businesses the end of the year is simply not good enough. Are there 
additional steps that the FTC, CFTC or FERC could take right now to 
ensure that our markets are not being subject to manipulation?
    Answer. FERC staff is working diligently to ensure that the 
electricity and natural gas markets subject to FERC's jurisdiction are 
well-functioning, including investigating potential violations of the 
anti-manipulation authority granted by Congress in the Energy Policy 
Act of 2005 (EPAct 2005) and implemented by FERC in 18 C.F.R. Part 1c. 
For example, since the passage of EPAct 2005, FERC used its enforcement 
authority in two market manipulation cases when it issued show cause 
orders that made preliminary findings of market manipulation and 
proposed civil penalties totaling $458 million in two investigations 
involving traders' unlawful actions in natural gas markets.
    With respect to oil and petroleum, FERC's jurisdiction is limited. 
FERC has jurisdiction only over ratemaking of oil pipeline 
transportation in interstate commerce under the authority of the 
Interstate Commerce Act and the Department of Energy Organization Act 
of 1977, 42 U.S.C.  7101 et seq. FERC has no jurisdiction over, and 
therefore no authority to investigate, the prices charged for oil, 
gasoline, diesel, or heating oil, or the markets where those and other 
oil and petroleum products are traded.
    I am not knowledgeable about, and therefore cannot speak to, the 
steps the FTC and CFTC may be taking to ensure the markets subject to 
their jurisdiction are well-functioning.

    Question 1a. What does FERC's experience with the additional power 
from the 2005 Energy Bill educate us about moving forward with the 
FTC's new authority?
    Answer. I cannot speak to the FTC's new authority, but FERC's 
experience with the additional authority provided in the 2005 Energy 
Bill has been very good. FERC was able to implement its new authority 
under the anti-manipulation provisions quickly and smoothly, due in 
large part, to the fact that Congress directed FERC to exercise its new 
authority in a manner consistent with section 10(b) of the Securities 
Exchange Act, as is detailed in my written testimony that I submitted 
on June 3. Further, the 2005 Energy Bill not only provided FERC with 
new anti-manipulation authority, but also provided FERC with enhanced 
penalty authority. FERC has not hesitated to use its new authority to 
police market manipulation by any entity, as exemplified in FERC's 
proceeding against Amaranth. The civil penalty authority granted by 
Congress in EPAct 2005 enhanced FERC's ability to vigorously enforce 
the wholesale electricity and natural gas markets that it oversees, as 
demonstrated by multitude of settlements FERC has entered into with 
electric and natural gas market participants.

    Question 1b. Do you believe that there is an opportunity for inter-
agency work on this issue and would that require additional statutory 
language?
    Answer. On April 16, 2008, FERC staff met with representatives of 
the FTC to discuss FERC's experience implementing the anti-manipulation 
power granted by Congress in EPAct 2005. In that meeting, and in 
subsequent communications, FERC representatives answered questions FTC 
staff had about Order No. 670, the FERC Order promulgating the 
prohibition of market manipulation codified in 18 C.F.R. Part lc.
    FERC staff has and continues to provide any and all assistance 
requested by the FTC. I do not believe there is any need for additional 
statutory language in this regard.

    Question 2. Two weeks ago before the Homeland Security and 
Government Affairs Committee, Mr. Michael Masters, Managing Member of 
Master Capital Management indicated that commodity index trading has 
risen from $13 billion at the end of 2003 to $260 billion as of March 
2008 and indicated that institutional investors are contributing to the 
rise in prices. Mr. Masters then proceeded to outline three actions 
that could reverse this trend. These included: (1) Restricting pension 
funds from using commodities futures markets; (2) Provide transparency 
in the over-the-counter markets; and (3) Delineate the classification 
of position in the commercial category of reports to indicate the 
position of banks as well as the physical hedgers. Do you believe Mr. 
Masters' underlying assumption are correct about the market place? Are 
index speculators artificially driving the price of oil up to levels 
beyond supply and demand?
    Answer. FERC does not regulate these activities and these questions 
are beyond the scope of my personal knowledge. Accordingly, I have no 
comment.

    Question 2a. Do you agree with Mr. Masters' prescriptions to the 
systems failure?
    Answer. FERC does not regulate these activities and these questions 
are beyond the scope of my personal knowledge. Accordingly, I have no 
comment.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Thomas R. Carper to 
                            Dr. Mark Cooper
    Question 1. You suggest in your testimony that the tax code be 
designed to distinguish between long-term productive investment and 
short-term speculative investment. Can you explain this proposal, 
exactly now it might work, and the impact it would have on commodities 
prices?
    Answer. Short-term capital gains have been taxed in the past. The 
principle is simply that a capital gain on an asset held for less than 
a specified period of time (e.g., 2 years) is subject to a higher 
capital gains tax rate. I proposed a tax rate that is 33 to 50 percent 
higher. This proposal is intended to address the long-term problem of 
the under investment in long-term assets in our economy. It will 
relieve pressures on the commodity markets by slowing the inflow funds 
into these markets. I recommended other reforms in prudential 
regulation of commodity markets such as, position limits, speculation 
limits, capital requirement, closing of loopholes and exemptions 
(Enron, Foreign Boards of Trade, and Swaps) that would burst the 
speculative bubble in oil. At the hearing I suggested that the 
speculative bubble had added $40 per barrel to the price of oil. Today, 
(July 12, 2008), the bubble has grown as the price has increased.

    Question 2. You suggest in your testimony that Americans are paying 
$1,500 more per year on gas due to high costs. Do people in some areas 
in the country feel the pain of high gas prices more than others? If 
so, why?
    Answer. Yes. While the national average is about $1,500 per 
household, those living in rural areas spend substantially more on 
gasoline, compared to urban consumers, because they must drive longer 
distances to accomplish daily activities. The 23 million households 
living outside urban areas have suffered an average increase of about 
$1,875; the 95 million households living in urban areas have suffered 
an average increase of about $1,400.

                                  
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